The stock market can be simply understood as a group of exchanges and markets where the purchase, sale, and issuance of public companies take place. It is a public market where traders and investors buy and sell shares. Stocks or equities represent the ownership of the stockholder in a company. NASDAQ, New York Stock Exchange, and Chicago Board Options Exchange are all examples of stock markets.
Stock markets act as a platform for trading several types of financial securities like corporate bonds, exchange-traded funds, derivatives based on stocks, and also for the trading of equities or shares. Stock markets all over the world have different rankings and have been in existence for centuries.
The first stock exchange was started in Belgium in 1531. Moneylenders and brokers would meet there and do business. Actual stocks weren’t used at that time and they would deal in promissory notes. Amsterdam Stock Exchange, established by the Dutch East India Company in 1602, is considered to be the first proper stock exchange. From there, the markets have progressed to a point where anyone can know about the meaning of Demat and trading, and can simply make use of the online trading apps and trade in the markets.
A stock, commonly known as a share, is a financial instrument that shows the shareholder’s ownership of a company. It exhibits the shareholder’s share in the earnings and assets of the company. If you own the stocks of a company, it gives you ownership to a part of the company. To start trading, you can open a free trading account with any leading broking house.
IMPORTANCE OF STOCK MARKETS FOR A COUNTRY
The purpose of stock markets is to serve a wider economy. When an individual invests a part of his income or savings in the stock market, the market helps him earn a profit on it. Businesses get large rewards and spread their risks when they invest in the stock market. The importance of the stock market for a country can be summed up as below:
- Stock markets are a secure and regulated platform where traders can trade in shares and other financial instruments. In the absence of stock markets, there would be no zero-to-low risk platform to operate for these people.
- Corporates pay taxes to the government to trade on the stock exchange, this income generates tax revenue for the government and the government can spend more on public welfare using this income.
- Stock market gives a major boost to a country’s economy by letting people invest and spend more money. In the absence of a stock market, many countries would not have developed the way they have.
- Stock market also helps individuals increase their wealth and helps improve their standard of living. This again gives a major boost to a country’s economy.
- In the absence of a stock market, companies would be forced to borrow money from banks and would have to pay a heavy interest on it. This would affect the profitability of companies and pull back the economy of a country.
- When people earn revenue from the market, the spending in the economy automatically increases. This has a multiplier effect and the increased spending helps in creating employment for people too.
- A rising stock market allures investment not only from local investors but foreign direct investment as well. This is great for the GDP of the country.
The stock market performance of a country acts as an indicator of the economic health of a country and indicates how well the economy is doing.