1. What is Stock Exchange?

2. Problems of Stock Exchabge
A stock exchange is an-organization for orderly buying and selling of ‘listed’ (approved) existing securities. The organization includes an association of persons or firms to regulate and supervise all transactions, rules, regulations and standard prac­tices to govern all market transactions, authorised stock brokers, and an exchange floor or hall where stock brokers or their authorised agents meet during fixed business hours to buy and sell securities.
At present in India there are 11 recognised stock exchanges in various parts of the country. The one at Bombay is the leading stock exchange. It leads other exchanges in terms of the number of securities listed there, the importance of companies whose stocks are traded there, the average volume of daily business, and its capacity to absorb big buy and sell orders.
Listed securities are securities that appear on the approved list to a stock exchange. Approval depends on several considerations, such as the size of the issue, whether it is widely held by the public or closely held in a few hands, timely production of annual accounts, etc. Only listed securities are traded on the floor of the exchange. Therefore, listing improves marketability of a stock.
An organized stock exchange is an ‘auction’ type market, where prices of traded stocks are settled by open bids and offers on the floor of the exchange. Therefore, it is said that these prices are formed competitively.
To the extent that is so and to the extent buyers and sellers are well-informed and while bidding prices they take into consideration all the relevant factors, present and prospective, con­cerning not only the particular enterprise and the industry, but also the general economic and political conditions, the stock prices will be good measures of the true real worth of enterprises. In the process, better-run profit-making enterprises will appreciate in real value as compared to others. In a private-ownership economy (or sector) this helps and guides greatly the allocation of new resources.
In actual practice, nearly all the statements of the previous paragraph need to be qualified. Competition is not perfect in the stock market. This market is no leveller of the high and low. Big investors carry more weight and can influence the market their way. Already the weight the big financial institutions, such as the LIC, the UTI, the GIC and; subsidiaries has come to be felt. This need not always is to the disadvantage of the small investor.
Problems arise only when there is artificial manipulation of the market or when the firm holding of good stocks by institutions (and promoters) reduces too much the floating supply of such stocks in the market. Then, a slight increase in the demand for such stocks shoots their prices up. Also, small investors are not that well-informed. Nor do they have the requisite ability to analyse and interpret the myriad forces that impinge on stock prices.
Therefore, without the leadership of financial institutions, the prices formed by their transaction need not be good indicators of the true values of stocks. They are easily swayed by ‘animal spirits’. The result is frequent ups and downs of stock prices.
There is also an excess dose of speculation present in the market, especially during periods of market booms. Then, in a planned mixed economy, allocation of resources cannot be left to the operations of free market forces. A more purposive and socially informed allocation is needed. This is one of the justifications of the public sector and the Capital Issues (Control) Act that operated in the country.