The Role of the Stock Market

Abstract

The major socio-economic role of a stock exchange is the valuing of securities and the provision of a well-run market-place where investors can buy and sell shares. The ‘proper’ valuation of securities is important as it provides signals for the allocation of scarce capital resources. Thus investment funds are channelled towards those companies which can use them most profitably (and, from the viewpoint of a capitalist economy, most usefully). The provision of a well-run market-place — along with accurate pricing — is required if individuals are going to invest in private enterprise, either via some investment institution, for example a unit trust, or on their own. If the market is not well run and securities are incorrectly priced, then many individuals will stop investing and this will seriously reduce the availability of funds to expanding companies.