Stock market eco-system runs solely on money. This means that it should also impact the whole economical status of a country as well. In India where almost 7000 companies are listed in the two leading stock exchanges NSE and BSE, the impact of stock market on India’s economy can not be ignored. Let’s have a close look to what is the importance of stock market in economy.
First stock exchange in India was established within a decade of the first freedom fight erupted against East India Company. This was BSE Ltd., then named as The Native Share and Stock brokers Association. Since then lots of regional exchanges were established which later exited the bourse business due to the bye-laws of Securities and Exchange Board of India (SEBI). SEBI is the regulatory authority in India which was established in 1992 by Govt. of India to regulate the Indian financial market.
Currently, there are 7 (seven) active stock exchanges in India.
- Ahmedabad Stock Exchange Ltd.
- BSE Ltd.
- Calcutta Stock Exchange Ltd.
- India International Exchange (India INX)
- Metropolitan Stock Exchange of India Ltd.
- National Stock Exchange of India Ltd.
- NSE IFSC Ltd
Importance of stock market in the economy
To start the article. let’s first understand what economy actually means.
As per the definition
“An economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated. This is also known as an economic system.
In simple words,
A relation between the available money and the goods plus the capacity of the society to buy those goods.
So how does stock market can affect this relation of money and goods?
Let’s have a close look.
- Corporate companies’ growth
- Investor growth
- Helping government
- Banks and institutions
- Economic Barometer
Any company which is at its peak of plans and executions, if requires more funds than available for its expansion can gather funds directly from the public through the stock market. When any company faces such situation when it either doesn’t want to approach an investor or a bank for its funding knocks the door of primary market in the stock market. Here it offers a percentage of its shares to the public. This offering is called Initial Public Offering (IPO). Public includes big institutions as well as retail investors. They invest in the business by buying the IPO at the set price. This money through a certain process goes to the company. The company gets the funding by selling a part of the ownership to the public. This helps the company to work on its plans and expand the business. An expanded business means more goods/service to the society. Thus more goods/services are made available through the stock market.
After IPO is issued the stocks are available to the public in the secondary market. In this market frequent buy-sell of the stocks take place. A stock sold at a high price than the bought price brings profit and a stock sold at a low price than the bought price brings loss. This buy-sell process is the backbone of the stock market. So when traders/investors get profit from the stock market they have more money to spend and when they are at a loss they have lesser money to spend. Thus when there is a Bull Run, more money is available to the society but when Bears take charge society lives in lesser money. Here society is referred collectively to the traders/investors participating in the stock market.
Now consider a hypothetical situation
where there is just one company selling all the services and goods required by people. There is a society where everyone participates in the stock market.
That company issued IPO for its business expansion. Some investors bought the IPO. The stock gets listed in the secondary market and the frequent buy-sell process starts. Suddenly Bulls get activated and stock price rises. Society makes money. Everyone has more money than they require so they start buying luxuries e.g. car, tv, home etc.
Remember, for simplicity, in this hypothetical example there is just one company which is providing all these goods/services. This company has already expanded through IPO. Society is in profit and buying goods/services. Demand increases so it increases manufacturing. The company is manufacturing more. The economy is on a boom.
One day Bears take the charge. Now society is either losing money or its money is locked in the stock market. In this situation, people have less money to spend but the company is already manufacturing more goods. But people are not buying these goods because they don’t have the money. At this situation economy floors.
Coming out of the hypothetical situation to the real world. There are different companies for different services/goods. Replace all people of the society with the percentage of the society participating in the stock market. The impact is still the same. Demand increases with profits and decreases with the loss.
Thus stock market impacts directly the economy of a country.
There are times when a government wants to start a new project for the welfare of the society but can’t arrange the funds for the same. The government also approaches the stock market just like companies approach. The only difference here is that instead of issuing IPO and gathering funds, a government issue bonds. Public invests in the bonds. The government gets the money for the project and the public gets an assurance of an increase on their investment in the bonds.
Such projects are aimed at various developments of society thus in return improves the economy.
We all get some interest on our deposits in the various saving schemes in banks and institutions (LIC etc.). Bank provides some interest even on the simple saving accounts. One of the major source of banks and institutions to earn money is stock market. They invest the depositor’s money in the stock market and earn a profit. A small part of this profit is returned as an interest to the depositor.
These banks and institutions play a very important role to keep a nation’s financial status stable. The stock market keeps them alive and healthy, thus impacting the economy of a country.
The stock market has opened a new world of saving options for common people. Most commonly used stock market saving-options are Mutual Funds and SIP. The best part, these options give a very high return on the same amount of savings as compared to conventional saving options.
More return means more money to spend leading to a better economy.
The stock market of a country is seen as one of the economic barometers. Usually, indices of a leading stock exchange is considered for the same. A continuous healthy condition attracts more investment from local and foreign investors. This, in turn, increases the economic health of a country.
An economy is a relation between demand-supply and availability of money in the society. Stock market directly impacts this relation in various ways viz.
- It helps in the growth of company leading to more supply.
- It helps the growth of investors leading to more demand and money availability.
- It helps the government to execute expensive developmental projects for better economy.
- It helps banks and financial institutions to earn money which leads to a better economy.
- It provides better saving options than the conventional ones.