Question 7 of 11intermediate💡 UnderstandLong Answer5 marks

How does the stock market help mobilise the savings of individuals? In what ways do companies benefit by issuing shares to people?

Correct Answer

The stock market helps mobilise individual savings by providing a platform where people can invest their surplus money by buying shares of companies.

When individuals buy shares, they become part-owners of the company and can earn returns when share prices increase or through dividends.

The stock exchange facilitates the buying and selling of shares, making it easy for individuals to convert their savings into investments and vice versa.

Companies benefit from issuing shares in multiple ways: they can raise substantial capital for expanding operations, purchasing machinery, launching new products, and funding other business activities without borrowing from banks or taking loans.

By issuing shares, companies spread ownership among many investors rather than relying on a few lenders.

This capital helps businesses grow while shareholders share in the company's success through potential profits and increased share value.

Exercise: Questions and activities | Q: 7 | (Page Page 19)
For More Understanding

Explanation

The chapter explains that a share is a part-ownership in a company, and when someone buys a share, they become a part-owner of that company. It states that holding stocks allows individuals to put their savings where they expect to see an increase in their value when the share price increases, while issuing shares helps companies raise funds for their operations. The stock exchange is where actual buying and selling of shares takes place, with the Bombay Stock Exchange (BSE) being one of the oldest in the world since 1875.

Solution Steps

  1. The stock market provides a platform for individuals to invest surplus money by buying shares of companies

  2. Buying shares makes individuals part-owners of the company, enabling them to earn returns through increased share prices or dividends

  3. The stock exchange facilitates easy buying and selling of shares, allowing conversion between savings and investments

  4. Companies raise substantial capital for business expansion, machinery, and new products without bank loans

  5. Issuing shares spreads ownership among many investors instead of relying on few lenders

  6. Both companies and shareholders benefit — businesses grow while shareholders share in profits and increased share value

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