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The Role of the Stock Market

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The major socio-economic role of a stock exchange is the valuing of securities and the provision of a well-run market-place where investors can buy and sell shares. The ‘proper’ valuation of securities is important as it provides signals for the allocation of scarce capital resources. Thus investment funds are channelled towards those companies which can use them most profitably (and, from the viewpoint of a capitalist economy, most usefully). The provision of a well-run market-place — along with accurate pricing — is required if individuals are going to invest in private enterprise, either via some investment institution, for example a unit trust, or on their own. If the market is not well run and securities are incorrectly priced, then many individuals will stop investing and this will seriously reduce the availability of funds to expanding companies.

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Notes and References

  1. W. J. Baumol, The Stock Market and Economic Efficiency (Fordham University Press, 1965) for a discussion of the requirements of a well-run market place.

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  2. A. J. Merrett and A. Sykes, ‘Return on Equities and Fixed Interest Securities 1919–1966’ District Bank Review (June 1966).

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  3. A. Cowles, Common Stock Indexes 1871–1937, Cowles Commission Monograph (1938).

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  4. R. L. Weil, ‘Realized Interest Rates and Bondholders’ Returns’, American Economic Review, vol. 60 (June 1970);

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  5. R. J. Briston, The Stock Exchange and Investment Analysis, 3rd edn. ( London: Allen & Unwin, 1975 )

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  6. E. V. Morgan and W. A. Thomas, The Stock Exchange. Its History and Functions ( London: Elek, 1962 ).

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  7. M. A. Firth, Investment Analysis: Techniques of Appraising the British Stock Market ( London: Harper & Row, 1975 ).

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© 1977 Michael Firth

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Firth, M. (1977). The Role of the Stock Market. In: The Valuation of Shares and the Efficient-Markets Theory. Studies in Finance and Accounting. Palgrave, London.

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