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The Effect Of Stock Market On The Economy Of A Country

The Effect Of Stock Market On The Economy Of A Country

The role of stock markets in the rise and fall of any economy is pivotal. It deeply affects the growth of the industry and commerce in a country, which has a direct effect on the economy of that country. The stock market and its activities have always kept government, industries of the country, and even central banks on their toes since years. Even the best stock brokers in India have complete knowledge about the ongoing of the stock market.

The need for stocks for companies-

  • Any company looking for a probable expansion or starting a new business venture can raise funds for these activities in 2 ways- applying for a loan in the central bank or a financial organization and issuing shares through the stock market. The latter is usually chosen by most companies and they prefer dabbling in the stock market to raise funds for expansion.
  • When a business or a company displays its set of shares in the stock market, it basically offers part ownership of the company to the investor. In order to facilitate incoming capital through shares, the company must first get listed on a stocks exchange and ensure funds for their business venture. These stocks can only become public if that company follows the rules and regulations for getting listed on the stock exchange and follow the criteria to become public.
  • These shares are then listed on the stock market. The stock market creates a link between the investors and the companies selling shares. If a company is entering the stock market for the first time, it needs to issue an IPO (Initial Public Offering) before commencing the hunt for investors. If a company is already listed on the market, they can issue a new set of shares to collect more funds for expansion purposes.

The need for stocks in the economy-

An incremental change in the stock market shows a sign of development in the industries and a growing economy that is beneficial for the country.

  • The aggregate value of publicly traded companies is measured by the stock market. The buying activities increase prices, and this leads to a rise in the stock market which ultimately signals investor confidence.
  • Any rise in the stock market automatically increases the stock investments. Consumer confidence in buying of commodities and services increases due to increase wealth. The companies and businesses which are engaged in financial transactions with these consumers benefit from the increased revenues.
  • The depreciation of a company’s market value shakes the investor and causes wealth erosion. A consumer is more likely to reduce spending the moment a drop in stock prices is seen. This leads to adverse effects on businesses that sell non-necessity goods, such as entertainment products and services and luxury items which a consumer can compromise on when the money is tight. This negatively affects the economy and reduces the overall standard of competition between companies and can also lead to malpractices and scams. The stock market can be seen as an instrument that can gauge the condition of the economy of the country at any given time.

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