Page 182 - Initial Public Offering - An Introduction to IPO on Wall Street

12.1.2 Functions of a Stock Market
From the above explanation, the primary purpose of the stock market seems to be evident.
There are however extra functions of the market that are not as visible. The following are the
main functions that a stock market primarily serves.

Secondary Market

It's the primary role of any stock market. Every stock market acts as a secondary market for
the shares issued by a business. Therefore, holders and shareowners meet on the platform to
conduct controlled securities activities.

Economic Health

The stock exchange acts as a financial health barometer as well. Experts use the stock market
to forecast the course of several financial markets. If the stock price increases, for instance, it
is an indication of relief and the desire of the investor to invest in risky assets.

Reliability of a Business

A stock market also establishes the reliability of the firm whose shares are listed on it. To be
listed on a stock market, there are conditions that the company would need to fulfill. This
provides investors with something to evaluate a business based on before they buy its stock.

Safe Transactions

Every stock market has a regulator that regulates its operations. Along with affluent and
institutional investors, a large fraction of small investors is also supported for their small
investments by the stock market. Such investors may have minimal financial expertise and
may not be completely aware of the risks of the investment in securities and other
instruments listed.

The stock market must take the necessary steps to provide such investors with the necessary
security to safeguard them from financial losses and to ensure consumer trust. For example,
according to their risk profiles, a stock exchange can categorize stocks in different segments
and enable restricted or no trading in high-risk stocks by common investors. Markets also
enforce limits to stop risky bets on derivatives from reaching individuals with limited income
and expertise.

In addition to the above, listed businesses are heavily regulated and market regulators, such
as the U.S Securities and Exchange Commission (SEC), control their transactions. Moreover,
exchanges often require certain provisions to ensure that all market participants are aware of
corporate activities, such as the prompt filing of periodic financial statements and immediate
reporting of any related developments. Failure to comply with the regulations can result in
the termination of trading by the markets and other forms of disciplinary actions.

Fund Mobility

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