Why is the stock exchange called a barometer of the economic and business conditions in a country?

   Stock exchange is defined as an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities. All stock exchanges function according to the provisions of the Securities Contracts (Regulation) Act, 1956. Stock exchange is an organised market where all transactions take place as per the rules and bye-laws of the concerned stock exchange. In a stock exchange, securities such as shares, debentures, bonds etc are bought and sold issued by central, state and local governments, port trusts, joint stock companies, municipalities, public corporations and utility concerns. Transactions in a stock exchange occur between members or their authorised agents on behalf of the investors. There are fourteen stock exchanges in India. Stock exchanges are not only used as a platform in order to carry business transactions but they are the barometers that helps in indicating the general conditions of the business atmosphere. One can measure the economic and business conditions with the help of stock exchanges as they provide real and accurate information about the companies. Prices of securities rise during economic and business prosperity periods. When economic stagnation occurs or business activities slowdown due to depression in the markets, prices fall. Security prices change with the change in economic, social and political conditions.

Economic Functions of Stock Exchange

The functions are divided into two types from the economic point of view-primary functions and secondary functions.

Primary Functions:

1. Mobilising surplus savings: It forms an important part of capital market of a country. Industrial and commercial undertakings can make use of the savings provided by stock exchanges from all parts of the country with a view to meet their financial requirements.

2. Mobility of capital: It provides capital mobility and sound investment because savings invested in securities are converted into cash in order to reinvest in other securities. It is possible because of the continuous and open market provided by stock exchanges for securities.

3. Contribution to capital formation: Investors get proper information regarding where and how to invest their savings in order to fetch a fair return with the help of stock markets. People start saving as soon as they come to know about investment avenues.

4. Marketability and price continuity: As buying and selling of securities take place conveniently in stock exchanges, it provides for easy marketability of securities. Continuity in the dealings is also there because buying and selling takes place on a regular basis.

5. Facilitates resource allocation: Stock exchange provides for mobility of funds i.e. movement or flow of funds in the economy as a whole. People invest their savings in those projects of the industries which have proper growth potentials. It is possible to allocate the financial resources of the economy reasonably. 

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