Stock Market And Economic Growth

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Shares of the stocks that are to be traded owned by the public companies are listed in the Stock Market. These shares are floated by companies in the primary market for the common public through a process called Initial Public Offering (IPO). In short Stock Market is the common place for meeting of stock buyers and sellers.

The securities will be introduced in the primary market and thereafter they will be traded in the secondary market. The regulatory bodies governing the secondary market or stock exchanges. Each country has their own regulatory body like India’s regulatory body is Securities Exchange Board of India (SEBI), Australia’s regulatory body is Australian Securities and Investments Commission (ASIC), Bangladesh regulatory body is Securities and Exchange Commission (Bangladesh) etc. The regulatory body is for the regulation of both primary and secondary markets.

An only stock listed on an exchange could be bought or sold. Listing some of the major stock exchanges 1) Bombay Stock Exchange (BSE), 2) National Stock Exchange (NSE), 3) New York Stock Exchange (NYSE), 4) National Association of Securities Dealers Automated Quotation (NASDAQ).

In the simplest of terms, Economy represents the wealth of a country in terms of production and consumption of various goods and services.

Stock Market contributes a major part in improving the economic growth of the country. Traditionally, the stock market has been considered as an indicator for an economy. In addition, stock market forms the support and framework for a nation’s economic infrastructure.

Stock Market facilitates a smooth exchange and regulation of stocks as well as other financial assets. This kind of regulation ensures the formation of a fair environment not only for the investors but for the public listed companies as well.

Moreover, talking of relating stock Market and Economic growth has always been debated. It is the endless topic in debating. Let’s have a closer look to gain a better understanding of the complexities associated with it.

Is Stock Market a parameter for the evaluation of economic growth?

The Stock Market ups and downs reflect the growth of an economy is a sensitive statement to pass. In general, the stock market does reflect the economic conditions prevailing in a country.

Numerous arguments have been observed in context to the actual role of Stock Market in representing the growth exhibited by an economy. However, it is not the sole parameter on which the growth of an economy is entirely dependent. Stock markets those are internationally integrated can only affect economic growth, which enables the Enables the economic risk sharing in greater extent.

Researcher/Analysts who are in favour of predictive ability of market tend to believe that the stock market is progressive. Further, the current prices are a representative for the potential of future earnings along with the expected profitability of corporations.

Role played by Stock Market in the overall Economic Growth

As there is a growth in the economy then the outcome will increase as too which implies that most firms will experience an increased profitability. Moreover, higher profits make an organisation more attractive as they are then capable of giving increased dividends to its shareholders.

On the other hand, if the recession is predicted to hit the stock market it will result in a dip in the share prices resulting in lower profits. In addition, if the recession affects the economy, for instance, this situation can be theorized by stock market by bidding low or decreasing the bidding prices of stocks.

However, this is a subjective aspect as this fall in the share price could also be due to other reasons such as correction of over-valued share prices or change in market sentiment or behaviour of the investors.

In addition, lower or fall in stock prices could simply point to a decrease in the wealth for businesses, pension funds, and individual investors. Moreover, the companies cannot expect much funding for their expansion. Even diversification of stocks doesn’t help much and a crash typically drags down all the sectors in an economy.