Economics of Financial Markets
What are the purpose and functions of stock exchanges as financial intermediaries? Financial intermediaries are institutions such as building societies, banks, stock exchanges and insurance companies. They all act as an intermediary between people, institutions or countries that may have high incomes, profits or surpluses and those that have lower incomes, losses and deficits. Some major stock exchanges around the world are: the New York stock exchange (NYSE), NASDAQ, American (AMEX), London (LSE), Toronto (TSE), Bombay (BSE), Australian (ASX) and lastly the Tokyo stock exchange (TSE)
One of the main purposes of the stock exchange is to provide a platform for the new born companies and existing ones to raise money through the issuing of shares, this takes place in the primary market. The primary exists because of the symbiotic relationship it shares with the secondary market. The liquidity of exchange is very attractive for investors to buy and sell securities at any given time. There is strong evidence to say that the stock exchange and the economy of the country support each other. The stock market shows the strength of the economy and the stage of development. Therefore it’s important for stock exchanges to compete for investors’ funds and hence acquiring a large amount of investors which as a result means a more important economy but also being vulnerable to ‘‘the butterfly effect’’ or the famous saying ‘‘when America sneezes, the rest of the world catches a cold’’. In a large reputable stock exchange, companies willing to enter must meet the NYSE Euronext requirements. Additionally, the stock market must have two qualities: deep market and broad market. Deep market absorbs transaction of high magnitudes, able to maintain its share price with no relation to the large quantity of shares being sold. This is also achieved due to the dark pool trading adopted the LSE. The broad market refers to the variety of shares of...
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