Importance of the Stock Market Roles - Assignment Example

The importance of the roles played by the stock market To enable investors to trade securities, they must be able to access the assets. The primary and secondary securities markets do exist to enable investors have the access and also enable the sale and purchase of securities. Primary markets basically are new markets while secondary markets on the other hand are the resale markets. Having a clear understanding of the two markets work is very important to investors for it enables them to be aware of various securities. According to Giddy (1994),the stock exchange being a form of exchange that is intended to provide services to the stock traders and brokers who basically deal with not just stocks, but bonds and many other securities. The stock market has so many roles that it plays and the various roles are of utmost importance as a primary market and as a secondary market in the development of the economy. There are quite a number of the most stable, mature, and well performing stock markets around the world, for instance, London, Hong Kong and New York(Van Antwerp,W,1975)  The roles that the stock markets perform are very central to the development of any economy. By virtue of the primary markets being involved with new securities, this is where an investor interested in initial public offerings of any public company and also government bonds can easily go find them. In such a market, securities are sold to investors directly from the selling company itself. This makes trading at the stock market faster and easier. In the London stock exchange for instance ,one of the most common traded securities are the municipal bonds, this basically entails the direct purchasing of debenture from the concerned authorities, for instance, the municipality. The London stock exchange put a lot of premium on these primary markets because to them, these markets are very important not just in strengthening the economy but also in as far as capital markets are concerned. The recent world financial crisis had, indeed, a great negative impact to the performance of the stock markets world over. The stock exchanges, for instance, does provide facilities related to issuance or redemption of securities and many other like capital events, income payment and dividends. Securities that are traded on any given stock exchange may include shares that are provided by the unit trusts, companies, derivatives as well as investment products such as bonds(Giddy,1994) Stock exchange is, in most cases considered to be the most necessary component of any stock market. The stock market’s demand and supply is normally driven by so many factors which, in virtually all the fee markets, affect stocks’ price. In any country the financial system tends to fund other areas from the haves and their surplus funds to the ones with a shortage in funds, by direct market financing or indirect bank finance. A country’s financial system and markets matters a lot in as far as the economic growth is concerned. The stock market plays a very big role in ensuring that the economy grows steadily. As much as some economists do not believe in the argument that the finance-growth kind of relationship between how well or bad the stock market is doing to the economic development.The economic development that is seen in any place always creates demands for certain types of financial arrangements, and financial system always tend to automatically respond to such demands. The stock market has natural mechanisms that help in addressing the issue of ensuring that a nation or a city has achieved what is considered to be the optimal financial system outlook. Overall, the stock market stabilizes the financial system, together with other well-developed systems for instance a good legal system, and this is normally done by incorporating elements or aspects of direct market based finance and indirect banking based finance. A stable and well developed stock market ensures that that there is a stable and strong financial system in place which in turn helps in improving the efficiency of serious decisions like financing decisions, easy and better allocation of various resources and consequently leading to steady economic growth. A good financial and monetary system is particularly important in matters like the reallocation the capital and consequently providing a reasonable basis for a constant reorganization and development of the economy which is necessary for supporting growth. In developed countries that have highly developed and complicated financial systems, it is observed that a bigger share of the investment is normally allocated to some of the relatively fast growing areas of the economy. When we for instance look back almost two centuries ago, during the famous Industrial Revolution, The financial system of England did a great job of not only identifying but also funding some of the profitable ventures within their country than other nations. This greatly helped England to enjoy relatively greater economic success. The stock market had also begun growing and attracting more investors hence its great impact in the English economy. Today the lack of a proper or a stock market that is well-developed would be such a serious disadvantage and a big mistake for the success of any economy. Equity is a very necessary element for the emergence and development of innovative organizations. In the modern times ,any young innovative and high-technology company is likely to be the main driver of the future and particularly it can be considered to be the much needed structural change that is essential for maintaining a long-term growth . The contribution that a financial market has in this area of an economy is necessary is as far as maintaining the competitive nature of an economy is concerned given today’s strongly and cut throat international competition, increased rapid technological advancement and the now increased role that innovation for companies growth performance. In the recent years, the so called new markets for young and still growing companies’ stock , have increasingly become very vibrant and emerging market segment across Europe. Equity financing seems to be a very advantageous aspect to these companies and in fact their investors given all the uncertainties that riddle their economic return. Like the term shares always suggests, with the equity financing one gets their share of from the outcome, regardless of it being positive or negative. The banks, may appear to be reluctant in providing loans owing to the fact that the risk profile of some of these firms, and also the relatively great exposure to very negative result in regard to loan contracts. The total market capitalisation that new markets in a number of European countries grew steadily from approximately from Euro 7 billion around the beginning of the year 1998 to approximately Euro 167 billion by December in the year 2000. While partly this increase can directly be attributed to the rise in the share prices within that said period of time, it is necessary to acknowledge that the number of all the listed companies drastically increased in virtually every month(Giddy,1994). The number of some of the very active companies listed on the new markets in Europe increased from sixty three (63) at the beginning of 1998 to approximately five hundred and sixty-four (564) towards the end of 2000.Stock markets are vital but at the initial stages ,they may prove to be a bit of a problem in the sense that they are faced with lots of uncertainties which are normally attached to the future development of the listed companies to experience more volatility as opposed to established markets. Once a security has gone past its offering at the preliminary stage -primary market, it is then made available for trading in the secondary markets like in the stock exchange and also in the brokerage firms. They normally take a certain period of time before the particular issue is made available in a secondary market. The banks act as financial assistants who by nature improve cost by allocation of share capital. The securities markets in most cases tend to be not sufficiently liquid or at times some of them ,particularly the small and the medium enterprises lack the ability to cover their liquidity needs through securities markets due to high fixed costs for access. According to Giddy (1994), Stock exchanges do perform many other important roles in the national economy as secondary markets. They basically encourage people in business and investment by, for instance, providing places those interested as buyers and sellers for the sake of trading securities. This investment enables many corporations to basically obtain funds and to expand their respective businesses. Corporations normally issue more and new securities in what is commonly known as the primary market, this is normally done with the help of good investors. This investment bank buys the initial issue of whatever new securities from a company at a negotiated price, after which, they make the securities readily available for their clients and investors in what is called the initial public offering, abbreviated as (IPO). In the primary market, organisations and corporations receive the profits that arise from stock sales. Just after the initial offering, securities can be purchased and then sold later in secondary markets (Van Antwerp,1975). The companies or corporations are never involved in the buying and selling of their stock in secondary market. Stock exchanges essentially function like secondary markets. This is done by providing the investors an opportunity to do trading with financial instruments, stock exchanges thus support the performance of primary markets. This kind of arrangement makes it possible and easy for a company to raise funds needed to build and expand their respective businesses. Works cited Giddy, Ian . Global financial markets. Lexington, Mass. Heath 1994. Print. Van Antwerp,William.The Stock Exchange from within.New York : Arno Press, 1975. Read More