Explain briefly the importance of stock exchange in a modern society. What are its shortcomings.
Stock exchange is a market or a place where various types of securities are bought and sold. It is organized as an association or society or company and every member has to deposit the prescribed membership fees.
Importance of Stock Exchange
- It is a market that is organized as an association or a society or a company.
- All the transactions of buying and selling are regulated by rules and bye-laws of concerned stock exchange.
- Transactions in a stock exchange occur between members or their authorized agents that work on behalf of the investors.
- Central, state and local governments, port trusts, municipalities, joint stock companies and public corporations issue securities such as shares, debentures, bonds etc, which are bought and sold on the floor of a stock exchange.
Shortcomings of Stock Exchange
Operations on stock exchanges can prove to be harmful to companies and investors if they are not controlled. Stock exchanges have to face problems because of the brokers who engage themselves in speculative buying and selling of securities without legitimate reasons. This in turn, causes fluctuations in security prices.
Wide fluctuation in prices: This is one of the limitation of stock exchange operations. Security prices may tend to fluctuate due to many reasons like unpredictable political, social and economic factors and rumours spread by interested parties. Fluctuations related to factors can be lowered down by speculators having knowledge and skill.
When speculators spread rumours for their own profit, prices rise and fall excessively and sound investors cannot decide whether to buy or sell. Many investors get panicky when they find the prices steeply declining. Others buy in haste because of the rising prices. Investors may experience losses because of buying and selling securities in such situations.
Excessive speculation: This is another short-coming of stock exchange operations. Speculation means buying or selling the securities in order to make profit from the difference in prices. Speculative buyers do not pay for the securities or take delivery of securities. As soon as they make bids in order to buy, prices shoot up. Whereas, speculative sellers do not possess securities or receive payment and deliver securities. Prices are lowered down as soon as they make bids to sell.
High prices suddenly crash, when no reason exists for prices to shoot up, if buyers are required to pay for securities which they cannot do because of shortage of funds. In the same way, sellers may not be able to deliver the securities, even if they want to. Genuine investors cannot depend on changes in securities prices in order to visualize the future prospects of a company.