W HAT IS STOCK EXCHANGE?

Stock exchange is place where buyers and sellers meet and decide on a price of
stocks. The purpose of a stock market is to facilitate the exchange of securities between
buyers and sellers, reducing the risks of investing.

A stock exchange is an organization of which the members are stock brokers. A stock exchange
provides facilities for the trading of securities and other financial instruments. Usually facilities
are also provided for the issue and redemption of securities as well as other capital events
including the payment of income and dividends. The securities usually traded on a stock
exchange include the shares issued by companies, unit trusts and other pooled investment
products as well as corporate bonds and government bonds.

History
The first stock markets were established in 17th century London coffee houses. In place
of the sleek electronics and frenzied trading floors typical of todays market, folks
interested in owning commercial shares of businesses came to places like Jonathans
Coffee House. There, innovators such as John Castaing posted stock and commodity
prices for marketable securities in London, according to the London Stock Exchanges
historical record. This was the earliest evidence of organized trading, moving from
coffee houses to an actual exchange on March 3, 1801.

Functions of stock Exchange

The function that stock market performs is to facilitating the exchange of securities
between buyers and sellers, reducing the risks of investing.

The functions of stock exchange can be divided into following;

1. Main activities:
To promote the savings and aid in buying and selling of securities. The negotiations
will be done on the primary market.

Stock exchanges may also provide facilities for issue and redemption of securities and
other financial instruments, and capital events including the payment of income
and dividends. Securities traded on a stock exchange include stock issued by listed
companies.

To provide liquidity to the investors.

The investor can get back the money invested when needed. For it, he has to go to the
stock exchange market to sell the securities previously acquired. This function of the
stock market is done on the secondary market.
Stock exchanges here function as "continuous auction" markets, with buyers and sellers
consummating transactions at a central location, such as the floor of the exchange.
To be able to trade a security on a certain stock exchange, it must be listed there.
Usually, there is a central location at least for record keeping, but trade is increasingly
less linked to such a physical place, as modern markets use electronic networks, which
gives them advantages of increased speed and reduced cost of transactions. Trade on
an exchange is restricted to brokers who are members of the exchange

2. Functions as an organization are:

To guarantee the legal and economic security of the agreed contracts.
To provide official information timely and accurately about the securities that are
negotiated and the quote prices as well.
To fix the prices of the securities according to the fundamental law of the offer and
the demand.

Factors that affect the stock exchange

Interest Rate
Essentially, interest is nothing more than the cost someone pays for the use of someone
else's money. Homeowners know this scenario quite intimately. They have to use a
bank's money, through a mortgage, to purchase a home, and they have to pay the bank
for the privilege.
Basically, by increasing the federal funds rate, the Fed attempts to lower the supply of
money by making it more expensive to obtain.

Inflation
Investors, the Federal Reserve and businesses constantly monitor and worry about the
level of inflation. Inflation - the rise in price of goods and services - reduces
the purchasing power each unit of currency can buy. Rising inflation has an insidious
effect: input prices are higher, consumers can purchase fewer goods, revenues and
profits decline, and the economy slows for a time until a steady state is reached.
High inflation can be good, as it can stimulate some job growth. But high inflation can
also impact corporate profits through higher input costs. This causes corporations to
worry about the future and stop hiring, negatively impacting the standard of living of
individuals, especially those on fixed incomes. Because there is no one good answer,
individual investors must sift through the confusion to make wise decisions on how to
invest in periods of inflation. Different groups of stocks seem to perform better during
periods of high inflation.

(http://business.inquirer.net/178899/how-does-inflation-affect-the-stock-market)

Debt level
Debt is raised simply to fund public consumption, such as proceeds used for
Medicare, Social Security and Medicaid, the use of debt loses a significant amount of
support. When debt is used to fund economic expansion, current and future generations
stand to reap the rewards. However, debt used to fuel consumption only presents
advantages to the current generation.
Countries will engage in large-scale deficit financing to pay for public sector projects
and governmental funding. While such activity stimulates the domestic economy,
nations with large public deficits and debts are less attractive to foreign investors. The
reason? A large debt encourages inflation, and if inflation is high, the debt will be
serviced and ultimately paid off with cheaper real dollars in the future.

Balance of payments
The balance of payments (BOP) is the method countries use to monitor all international
monetary transactions at a specific period of time. Usually, the BOP is calculated every
quarter and every calendar year. All trades conducted by both the private and public
sectors are accounted for in the BOP in order to determine how much money is going in
and out of a country. If a country has received money, this is known as a credit, and if a
country has paid or given money, the transaction is counted as a debit.
The balance of payments classifies all transactions in two accounts the current
account and the capital account. The current account includes transactions in goods,
services, investment income and current transfers, while the capital account mainly
includes transactions in financial instruments.
Maintaining a balance of payments with the rest of the world is a macro-economic
objective.

The current account

The capital account is where all international capital transfers are recorded. This refers
to the acquisition or disposal of non-financial assets (for example, a physical asset such
as land) and non-produced assets, which are needed for production but have not been
produced, like a mine used for the extraction of diamonds.

The capital account is broken down into the monetary flows branching from debt
forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a
country, the transfer of ownership on fixed assets (assets such as equipment used in
the production process to generate income), the transfer of funds received to the sale or
acquisition of fixed assets, gift and inheritance taxes, death levies and, finally, uninsured
damage to fixed assets.

Capital Account
A nations capital account calculates the economic activity of a country or region. A
corporations capital account is a general ledger account used for recording the
amounts an investor pays to the company and the cumulative amount of the companys
earnings minus cumulative distributions to the owners. Capital accounts balances are
reported in the owners equity, partners equity or stockholders equity section of
the balance sheet.

Effect over Stock

The balance of payments (BOP) is the official record of all financial transactions that
cross a country's borders. This includes international trade of goods and services (part
of the capital account) and all capital investment flows to and from foreign entities (part
of the capital account). While the BOP doesn't actually "affect" the capital stock of a
country, it does record changes in the capital account that can be tracked over

Role of Stock Exchange in economy

Stock exchanges have multiple roles in the economy, this may include the following:

1. Raising capital for businesses:

The Stock Exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public. It induces people to save and invest in
securities. There is regular publicity of its operations, which encourages savings and
investments. People know that when they need money, they can easily sell their
securities on stock exchange. Therefore, they are more willing to invest their savings in
securities.
Thus a stock exchange serves as an instrument for raising capital.

2. Mobilizing savings for investment:

When people draw their savings and invest in shares, it leads to a more rational
allocation of resources because funds, which could have been consumed, or kept in idle
deposits with banks, are mobilized and redirected to promote business activity with
benefits for several economic sectors such as agriculture, commerce and industry,
resulting in stronger economic growth and higher productivity levels and firms.

3. Facilitating company growth:

Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market shares, or acquire
other necessary business assets. A takeover bid or a merger agreement through the
stock market is one of the simplest and most common ways for a company to grow by
acquisition or fusion.

4. Redistribution of wealth:
Stock exchanges do not exist to redistribute wealth. However, both casual and
professional stock investors through dividends and stock price increases that may result
in capital gains will share in the wealth of profitable businesses.

5. Corporate governance:

By having a wide and varied scope of owners, companies generally tend to improve on
their management standards and efficiency in order to satisfy the demands of these
shareholders and the more stringent rules for public corporations imposed by public
stock exchanges and the government.
The regulations required for a corporation's stock to be listed on the Stock Exchange
and the ongoing requirements to maintain that listing are a good way to ensure that
management standards and standards of record keeping within that corporation are
maintained at a high level. There have been notable exceptions, but generally record
keeping of publicly quoted companies has been shown to be better than that of private
companies.
6. Creating investment opportunities for small investors:
As opposed to other businesses that require huge capital outlay, investing in shares is
open to both the large and small stock investors because a person buys the number of
shares they can afford. Therefore the Stock Exchange provides the opportunity for small
investors to own shares of the same companies as large investors.
7. Government capital-raising for development projects:
Governments at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works or housing estates by
selling another category of securities, known as bonds. These bonds can be raised
through the Stock Exchange whereby members of the public buy them, thus loaning
money to the government. The issuance of such bonds can obviate (to remove) the
need to directly tax the citizens in order to finance development, although by securing
such bonds with the full faith and credit of the government instead of with collateral (side
by side), the result is that the government must tax the citizens or otherwise raise
additional funds to make any regular coupon payments and refund the principal when
the bonds mature.
8. Barometer of the economy:
At the stock exchange, share prices rise and fall depending, largely, on market forces.
Share prices tend to rise or remain stable when companies and the economy in general
show signs of stability and growth. An economic recession, depression, or financial
crisis could eventually lead to a stock market crash. Therefore the movement of share
prices and in general of the stock indexes can be an indicator of the general trend in the
economy.

9. Regulation of companies:
The stock exchange exercises a wholesome influence on the management of
companies. A company that wants to be listed on stock exchange must bind itself to the
rules and regulations prescribed by the stock exchange.