Why The Stock Exchange Market Is Important For The Economy
A stock exchange market provides a central location for investors to come together to buy and sell shares in companies. These transactions take place for listed companies that have to make public announcements of profit, loss and sales figures. The individuals who buy shares of these companies are its shareholders and they are entitled to a yearly dividend amount set by the company.
The stock market has two main segments – the primary market and the secondary market. New issues of shares in a company, or initial public offerings (IPOs), are dealt with in the primary market, while existing shares can be bought or sold in the secondary market. Most of the daily trading volume comes from the secondary market.
Stock market and the economy
A stable stock exchange market indicates healthy trading activity and strength in the country’s economy. Rising prices of stocks and other securities are pointers to the level of economic growth. The performance of the stock exchange can also be seen as a barometer of public sentiment, and conversely, the general perception of investors about the economy can also influence the stock exchange significantly.
A fall in stock prices indicates pessimism among investors and an expectation of subdued industrial activity in the near future. Any uncertainty in the country, like an impending change in leadership or the chance of a military coup can also subdue prices in the stock market.
Why we need stock markets
The economy can benefit immensely from a stock market that is properly regulated, transparent, and allows investors to conveniently buy and sell stocks to earn returns. A stock exchange market fulfills two primary purposes:
- It encourages public participation in private business ventures. Entrepreneurs with good business ideas can raise huge amounts of capital by launching a public issue of the company’s shares in the primary market.
- Through the stock market, investors get the opportunity to share the success of large institutions that have the expertise to do well in their ventures.
The stock market also allows companies to understand the market sentiments accurately. Their future strategies are often influenced by the way their corporate activities are received by the public and reflected in their share prices. If investors view a management decision favorably, then they will want to buy shares in the company to take advantage of expected future success. This will push share prices up. Similarly, the management can also draw conclusions from falling share prices and align policies accordingly.
Regulation of stock market
As the stock market plays such a vital role in the country’s economy, its regulation is extremely important. In the US, the Securities and Exchange Commissions (SEC), a Federal agency, carries out this critical function. The SEC’s key responsibility is to ensure that adequate transparency is maintained in all dealings and that investors are protected. Any suspicious activity in the market is investigated by the SEC, and the agency has the power to ban the culprit company or individual from participating in the stock exchange market.
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