Certified Financial Management Specialist Practice Exam

What is the main purpose of stock markets?

1. Establishing loan rates

2. Establishing stock prices

3. Establishing currency exchange rates

4. Establishing real estate values

The correct answer is: Establishing stock prices

The main purpose of stock markets is to facilitate the buying and selling of shares in publicly traded companies, which directly relates to establishing stock prices. This is accomplished through the interaction of supply and demand for stocks among investors. When more people want to buy a stock than sell it, the price rises; conversely, when more people want to sell it than buy, the price falls. The stock market serves as a platform where investors can evaluate company performance and investor sentiment, and the prices reflect the consensus value at any given moment. Stock prices are crucial because they provide important information about the health of a company, its future potential, and market conditions in general. Investors use this information to make informed decisions regarding buying, holding, or selling their shares, which in turn influences the company's capital and ability to grow or expand. Other options mention functions typically associated with different markets: loan rates are influenced by financial institutions and monetary policies rather than stock exchanges; currency exchange rates pertain to foreign exchange (forex) markets; and real estate values are primarily determined through real estate markets rather than stock markets. Hence, these alternatives are not aligned with the primary function of stock markets.