Growth and Development of Stock Market and Its Effects on Economy - Essay Example

Essay on Growth and Development of Stock Market and its effects on Economy Contents Introduction 3 2.Economic Activities and its types 5 3.Major Stock Markets and their Volumes 8 4.Economic Indicators and Stock Market: Symbiotic Relationship 10 5.Stock Market Growth and Development: Impact on Economy 10 A.Macro level Impact 12 B.Micro level 13 6.Conclusion 14 1. Introduction Genesis of complex international linkages among various nations, for the purpose of economic wellbeing gave birth to the concept of stock exchanges. A stock market actually is an assemblage of sellers and buyers which perform economic transactions and exchanges. These exchanges can be of different nature such as monetary based or asset based exchanges. Due to complex nature of various business a virtual setup is needed to be established which can make information regarding securities/ shares available to business entities and individual. Thus it can be said that regions and countries have economic activity houses known as stock markets. Stock markets have securities notified on stock exchanges and also provide private trading facilities. According to an estimate, at the close of 2012, world stock market was more than $50 trillion with US having the largest market of about 35% and United Kingdom and Japan with 6% each (Perry 1-2). Impact of stock market growth and development on economies is indeed an important area of research among economists. It provides for steering financial matters and forming future economic strategy to improve business and investment environment of a country. Thus impact of stock market growth has both direct and indirect effects on an economy. Industries, Service providers and Corporations of various types get their stocks available in stock market. Large companies usually put their stock available/ registered in many exchange markets around the world. It is done after weighing potentials of business in a specific stock market. Participant of stock markets are traders, banks, retail investors, insurance companies and corporations etc. which deem to invest, buy, sell, transfer and even evaluate their stocks through the facility of a stock market. Trading in stock market is done through evaluation and bidding process carried out among buyers and sellers who agree over a deal on value of the product. From hedge funds to stock investors the participants of a market can perform this activity anywhere in the world. A representative of business activity carries out buying, selling, exchange or valuation on behalf of his employer to execute exchange activity. Thus companies are not physically available or do not come with their active products and investment plans but they perform these transactions virtually through their representatives. A rational response to the concept of stock exchange and its activities can be transpired as effectiveness and vibrancy of economic activities in a market. However it is not that simple to label a vibrant stock market as the power house of an economy. There are several in depth aspects that are necessary to judge a market. In order to understand the relationship between stock market growth and development and economy of country, concept of economic activities, investments and business opportunities need to be understood. It is relevant to mention that stock markets help companies and organizations to raise money. They help in public and corporate trading activities and increasing capital through selling their shares. They provide ease of sale and capitalization of assets by providing liquidity. They also help in establishing prices and are main driver for economic condition of a region. The pricing values set in stock exchanges can be regulated through government laws and bindings along with buyer-seller dealing. Another relevant concept is the rising or falling of share prices (values) which generally appear as points on activity table. Rising prices/ value is associated with increasing investment. This means that the shares that are floated in the stock market may be welcomed and investors may buy them through a bidding process ending up on higher share value. The share prices affect directly the general public. Any share showing unexpected response might render the ultimate consumer out of cash thus affecting consumption. Certain laws and regulations have been specified in order to control eccentric activity. Health of an economy can be judged through the activity level and trends in stock markets. Disciplined and smooth functioning market helps in growth. Lowering of cost, expediting production of goods, improving services and even providing employment opportunities are few of the outcomes of a thriving stock markets.. 2. Economic Activities and its types Before getting into the details of stock markets around the world and their impacts, it is important to delve their rationale. Without the concept of types of economic activities, it will not be possible to comprehend this construct of economy. In effect economic activities are engagement of human and monetary capital in a certain way in order to maintain economic cycle of a people. These activities vary with type of investment plans and use of human resource. As a rule of thumb, first two economic activities form the basis of a region. Any region void of these activities remains fairly dependent on international providers. First is the primary economic activity that is essentially intensive labor based. Primary activities involve agriculture, fishery, animal husbandry, cattle rearing etc. Agrarian societies such as Vietnam, Burma, Sri Lanka, India Pakistan etc. have this economic activity deeply rooted in their economies. Intensive labor is a tool that makes use of human capital for growing crops of various kinds. Agrarian economies rely heavily on natural resources like land, water, rainfall and basic irrigation techniques. India, Egypt, Iraq and other regions which sprawl across water basins like Indus, Ganges, Nile and Euphrates are home to nearly a billion people. Next type of Economic Activity involves transportation, basic techniques of finishing of raw materials and trading etc. It is known as secondary economic activity and is the main reason for world being an international community. This type of activity, today, has made many nations interdependent of each other. Thus societies are becoming essentially dependent for their needs. Countries and continents are specializing in producing and developing their line of products to be conveyed and commuted to other regions. Materials received from countries having primary economic activities are raw in nature. They are converted into finished products in countries that have industries of various types. Their own produce may not match the production of primary regions of the world, yet their societies and economies are thriving on this type of economic activity. Advanced nations which have heavy industries such as ship building, steel making and manufacturing of complex automobile engines have virtually captured primary producing markets around the world. There is indeed interdependence that resides for both the sides yet transfer of technology is increasingly complicating this race for resources and services. Third and the most important type of economic activity, namely tertiary activity exists among highly industrialized nations. These activities have virtually gripped almost all types of economies rendering them to be the serving aspects of economy. Complex internetworking of business, various services, automobile industry, ores refinement, steel production and other such engagements of human-capital mesh define this type of economy. The raw comes from primary activity and is made available through secondary activities. One of the aspects that grasp major part of debate on resource control is the transfer of technology under tertiary activities. This transfer of technology has been block since the very beginning causing economic melt-down and crisis among developing nations. An excessive exploitation of resources and technology has deformed peace and economic edifice of world. Anyhow, this activity is concentrated, mostly, in upper part of the equator. At this point, the concept and basis of stock markets is comprehendible. World is changing fast. It is because of the reason that the distances between various markets are shrinking due to advancement of technology, stock building and faster transportation. As discussed in introduction, stock markets provide a place for buying-selling activities; economic activities benefit from them the most. Whatsoever be the type of business be involved, its output is carried to the stock markets to seek potential buyers, investors etc. Impact of stock markets is even more evident as trading is getting more entrenched in stock markets around the world. Developing nations are showing huge growth as world stock markets are booming. During last 10 years stock markets have shown capitalization of $15.2 trillion from a mere of $4.7 trillion helping developing countries experiencing a growth of 13% and above (Hamid 2-4). All types of activities provide their own product line and financial impact to world and regional economy. There is a growing debate over the impact of stock markets on economies. It is contested that whether the financial development causes economic growth or whether it is a result of increased economic activity. Prominent researcher suggests that these two propositions are two sides of a same coin (Pettinger 1-2). Increased economic activity calls for increased output which at certain time exceeds local requirements and is then endorse for exporting, selling in the international markets. Also that, economic activity gets feedback from stock markets to improve and enhance production setup and quality. Thus various entrepreneurs seem to take over the type of economic activity to enhance production to access larger and far off markets. In order to get into the details of this relationship one needs to seek arrangements in various international stock exchanges, momentum and level of business that are expedited by stock markets. A brief view of international stock markets is given in next section. 3. Major Stock Markets and their Volumes The impact of stock markets on economy can only be judged by considering role and volume of thriving markets around the globe. For this purpose world’s top stock markets are analyzed in this section. Note that there are certain attributes that accompany the concept of economic indicators these are (Wolski 1): 1. Business Cycle: This attribute suggests that economic indicators such as GDP, CPI and ER etc. move in the same direction as that of economy. For instance economies that show increased activity, production and earning will indicate procyclic environment. GDP is a type of this indicator in which there is a direct relationship with Business Cycle. 2. Frequency of Data: GDP figures are analyzed quarterly. Whereas the employment rate is scrutinized every month. Indicators that put this data forward hare developed by Doe Jones Index and give a true picture of economic activities and financial conditions of a region. 3. Timing: This attribute of economy is further categorized as leading, lagging or coinciding. It indicates the change (improvement or melting) that an economy might suffer. The constituent elements of this attribute are FDI, GDP and CPI, etc. Stock markets are helpful in bringing business and investment opportunities. They increase the likelihood that a certain produce will be consumed in business cycle. A feedback mechanism has been devised by economists to intimate stakeholders about weak points, market opportunities, business plans and capitalization-internalization aspects (Dow Jones, 1-3). Biggest of stock markets in the world are analyzed below: 1. New York Stock Exchange: NYSE is the larder stock market by trade value and capitalization. It is in fact a leading listing market for the world’s largest and medium companies. There are more than 8100 listed issues and during 2011 total of $20,161 billion trade value was achieved in this market. 2. NASDAQ OMX: Next to NYSE, NASDAQ stock exchange is placed according to the capitalization and trade value. During 2011, total of $ 13,552 trading value and $ 4,687 billion mark was achieved. NASDQ OMX group has 24 markets, 5 central securities depositories and 3 clearing houses. It houses 3,400 companies listed. 3. Tokyo Stock Exchange: TSE, as discussed shares 6% of the total world business volume, US being the first one with 34% share. Total trading value of TSE is $ 3,972 billion and Market Capitalization of $ 3,324 billion. About 100 domestic and 15 foreign companies are listed in this stock market. 4. London Stock Exchange (LSE): With headquarter in London; LSE is the fourth biggest stock market in the world. Total trade value as of 2011 stood at $ 2,871 billion and Market Capitalization at $ 3,266 Billion. This stock market is one of the largest international markets as it houses around 3,000 companies from around 72 countries. 5. Other stock exchanges of substantial business activities are Shanghai Stock Exchange, Hong Kong Stock Exchange and Toronto Stock Exchange. It is pertinent to mention here that economic factors also affect stock market activities. Growth and development of stock markets have substantial impact on economies, but a feedback phenomenon also affects stock markets. These are inflation and deflation, Interest rates of banks and the foreign Markets. Also there are certain international and national events that also have impact on stock markets. Internal and regional developments, World Events like 9/11, National and International Interest rates over deposits, type of regime like Fair Value Accounting/ Historical Value accounting, Exchange rates, Inflation, certain hypes and local crisis as a result of calamities. 4. Economic Indicators and Stock Market: Symbiotic Relationship Real economy has certain indicator. These indicators are objectively calculated and depict real picture of state of an economy. Few of the most important economic indicators are: 1. Consumer price index 2. Consumer Leverage ratio 3. Industrial Production 4. Import export balance 5. Gross domestic Product 6. Broadband Internet Penetration 7. Supply Demand ratio 8. Retail sales 9. Unemployment rate and quits rate These few indicators are directly connected with the economic activities and their types. Thus a relationship of buying-selling market with that of economic growth can be ascertained. The production and export rate indicates highly vibrant economy. Exports are done after dealing with production quality, pricing and availability of a certain entity. Thus stock markets while providing a gateway also list down haves and have-nots of a certain produce. The growth of stock market affects economy on two main fronts. One is the overall public development aims of government which are carried out on the base of business activities and taxes, while the other one is direct or indirect effect on ordinary people. Next section deals with in depth analysis that will help in understanding the hypothesis of this essay. 5. Stock Market Growth and Development: Impact on Economy According to prominent economist and market analyst, Pettinger, movements in stock markets have profound impact on the economy. A research was carried out in 2011 which analyzed market capitalization in London stock market of worth US $ 3.2 trillion (Pettinger 2). Economic indicators and their progression throughout were juxtaposed with market activity and a relationship was developed that indicated few important aspects of stock markets growth/ development and impact on economy. The great depression of 1930s ensued soon after the stock market crash in 1929. However, daily fluctuations in stock markets do not have any substantial impact. This counter argument of lesser impact is supported by the stock market situation during 2009 depression, where stock markets performed well. But it is important to note that the cumulative progress of trading and capitalization values is important to local and dependent economies. Pett also opines that stock markets also act as foreteller of any economic depression that might occur. For example, out of 10 predictions by stock markets analysts last 3 recessions proved to be the reality. Keeping in view stock market crash history and economic depressions there is an implicit expression of their relationship. However, it is now established that stock markets provide prognosis of economic activities (Randall 1-2). Important areas of economy that are affected by stock markets movement are given below: A. Macro level Impact a. Wealth Effect Investment in business has some capital involved. This capital is usually divided into a number of shares to be floated in exchange market in order to attract investors. A set of shares is bound to fluctuate in its worth and in case of rise or fall each share changes its value. This fluctuation is bore by investors collectively. However if fall is significant it might change the financial outlook. Spending money and investment are halted in case of depreciation of stock value. Thus a fall in consumer spending is seen. This is the concept that leads buying and selling of shares and securities. Thus stock markets provide a profound impact on trading and capitalization activities. Each stock market facilitates business and economic condition and its indicators are the net outcome. The wealth effect has prominent impact on housing markets as one could refer to the 2008 Lehman Brothers fall out. b. Effect on depositories and Pensions Pension whether managed by private trust or governmental organizations are profoundly affected by stock market behavior. The need of a stock market to be in a healthy environment, attracting business opportunities will provide a vast ground for the investment of important assets like pensions. A fall out due to uncertain market evident in stock markets can cause a struggling situation for pension funds. c. Confidence (Business) Stock markets which are small and weak do not attract business. Economic movement cannot be expedited by these markets. Therefore bigger stock markets are usually seen to attract more business. This fact is evident in case of stock markets of the US, UK and Japan. A recession hit market will not be able to provide confidence to investors. Thus healthier the market, higher will be the confidence of investors to accommodate business into it. d. Investment Falling prices can lead to prudent behavior of investors. In most of the cases investment is pulled out or at least stopped leading to no capital for further economic development and financing of various kinds. This fall out usually comes with stock market situation and is detrimental for economic growth of a region. e. Bond Market In some cases fall in stock market causes attraction to other investments. People trade and move to government bonds. This provides governments with a fairly good level of transaction towards its banks. Sometimes speculations cause pull out of investment from bonds as can be seen in Euro Crisis that weaken the economic situation directly. B. Micro level The effect of growth and development of stock markets on micro economics is also an important area of research. Pension funds, local business investment, loans, banking interests and short-termism are areas of substantial impact of stock market. Stock markets are a source of business investment and new firms and organization are formed or dissolved due to market conditions. They affect the employment opportunities and capital availability in local banks for personal account needs of people. Most of the investments are finance by banks instead of share options. Although stock markets play a lesser role at ordinary- individual level yet there is a clear relationship between investment and job market. Similarly pension funds also bear impacts of stock market developments. Prolonged depreciation and fall caused lowering of fund values which leads to low pension payoffs. In addition to this consumers and workers are deeply affected by short-termism which is encouraged by stock markets. Shareholders claim and argue for large dividends and thus stock market remains under pressure. This pressure causes an increase in short term profit for individuals. This type of phenomenon is usually seen in UK based firms which are ore prone to short termism. 6. Conclusion The impact of stock markets is a wider area of debate among economists. For most of the economists stock markets are important indicators of economic activities while others conclude it to have indirect impact on economy. However, the conceptual analysis indicates that stock markets house various economic activities which attract onlookers to invest and play an important role in economy. Works Cited Dow Jones. "Top 10 stock exchanges." Stock Exchanges around the World. Market Watch, 2013. Web. 7 May 2014. . Hamid Mohtadi. "Stock Market Development and Economic Growth: Evidence from Developing Countries." N.p., 2011. Web. 7 May 2014. . Pettinger T. "How does the stock market affect the economy?" Economics Help. Economics Help, 2013. Web. 7 May 2014. . Perry. "World stock market capitalization closes year at $54.6 trillion." AE Ideas, 2013. Web. . Randall. "DO STOCK MARKETS PROMOTE ECONOMIC GROWTH?" 1.1 (2009): Web. 5 May 2014. . Wolski, Chris. "Five Factors or Events that Affect the Stock Market | Chron.com." Small Business - Chron.com. Market Demand, 2012. Web. 7 May 2014. . Read More