Question

How does legal issues (laws, rules & regulations) affect the stock market? Please explain in detail.

Answer 1

A stock market involves issuing and trading of shares between the parties who may not know each other. In this regard, there is a need and significance of strong legal framework to regulate the stock market so that investors believe in the system and come for the trading. Since stock market creates a platform where the seeker of the funds meet the providers the funds, then the legal framework plays an important role to facilitate the trading and flow of funds takes place. So, legal framework and inherent issues affect the stock market as follows:

1. The degree of confidence among the investors and traders depend upon it.

2. Protection of the interest of the common investors

3. Prevent the illegal activities such as insider trading

4. Controlling of the speculation so that excessive volatility is prevented.

5. Providing liquidity and funds to the business houses

6. Overall efficiency of the stock market is controlled by the legal issues.

A sound laws, stringent set of regulations and competent body makes stock market to operate on a standardized manner where all the parties are regulated before they participate in the stock market. So, the stock market works with efficiency. It is the reason that households and firms in the domestic market and from overseas alike want to trade and invest through the stock market.