Function of security market

Price discovery

Price discovery is the first function of the security market. Price discovery is a determination of a fair price of the securities it trades. The interactions of buyers and sellers in a security market determine the price of the security.

The provision of liquidity

Liquidity refers to how an asset can be converted into cash. Security markets provide a mechanism for an investor to sell a financial security. Due to this feature, it is said that a security market offers liquidity. If you takes a long time to sell the shares or if you can sell them immediately only at a sacrifice, it does not meant liquidity. If you sell 20 shares of standard chartered immediately for a fair price, then the market provides you a good liquidity.

The minimization of trading costs or transaction costs

The third function of the security market is that it reduces the cost of transaction. There are two costs associated with transacting i.e. search costs and information costs.

Search costs represent explicit costs, such as the money spent to advertise ones intention to sell or purchase a financial security, and implicit costs, such as the value of time spent in locating a counter party. The present of some form of organized security market reduces search costs. Information costs are costs associated with assessing the investment merits of a financial security.

Organized securities markets lower the trading costs in a variety of ways. By restricting access and setting rules, by standardizing trades, by providing a framework for conflict resolution, and by guaranteeing execution.