Role of Stock Market in an Economy

Stock market is a place where shares of public listed companies are traded to raise funds from public. It provides an organised mechanism for purchase and sale of securities. The stock market plays an important role in the Economic development of a country. The main role of Stock exchange in an economy is as follows.

(i) Mobilization of savings and help capital formation:-

Every country especially developing country like India requires a high rate of growth to expedite for reaching target towards a member of developed nation. For this purpose, high rate of long term investment and capital formation are required. A well developed capital market offers adequate incentives that may allure the people and institution from every spheres of the society irrespective of national boundary to invest their savings in the stock market. In this market, various types of securities help to mobilise savings from various sections of population. Stock market provides reasonable returns and liquidity to an investor. This may play sufficient attractions to the people to indulge savings and accelerates the capital formation of the country.

(ii) Helpful in Raising Capital :-

The new and existing companies need capital for their activities. The commercial banks and other financial institutions provide loan to the companies. But, loan is costly source of fund. The new companies raise capital for the first time through primary market and existing companies increase their capital for expansion and diversification purposes. The intending buyers remain in touch with the market for investing money in shares.

(iii) Helps Industrial Growth :-

The savings of the people irrespective of nature, cast and creed try to find out their avenue in capital market for channelizing to the industrial growth. Thus, savings are being utilized for productive purposes rather diversified in the unproductive channel and sectors like Real Estate etc.

(iv) Helps to create permanent Capital :-

The companies require capital in permanent nature. But, the investors may not be willing to disinvest their funds permanently. The stock market acts as a mediator in order to mitigate the conflicts between issuers and investors. The investors get a continuous opportunity to buy and sell their securities in the stock market while permanent capital of a company remains undisturbed.

(v) Continuous market for securities :-

The stock market provides a ready market for securities. The shares once listed continue to be traded at stock market irrespective to the fact that owners go on changing. The stock market provides a regular market for trading in securities(shares).

(vi) Evaluation of securities :-

The stock market securities are quoted freely under demand and supply head and the prices are regulated on that basis. As a result, the investors can evaluate their holding easily.

(vii) Ensure easy liquidity of investment :-

The stock market provides a place where stocks are converted in cash. It provides a ready market where buyers and sellers are always available. Where investors need money, they can easily get hard cash by selling shares.

(viii) Platform of Public Debt :-

The ever increasing role of Government for economic development requires huge amount of funds for this purpose. The stock market provides a platform for raising public debts.

(ix) Helps allocation resources to the most efficient companies :-

The share market is the reflector of the actual worth of a company. The prevailing market price of a security and relative yield are the guiding factors for the investor to channelize the fund to the desired company.

(x) Helps to create a network of specialised securities :-

A number of specialized institution comes into existence to provide different specialized services in the stock market that ultimately helps smooth functioning of the market. Some of these services are as follows:

(xi) Stock market acts as Economic Barometer of a country :-

Stock market is not only as a platform in order to buy and sell of securities but also it indicates economic situation of the country. When the stock market is growing mood then it can be conclude that the economy is definitely growing and vice-versa. Any economic event in the country will affect the stock price instantly. So, stock market is directly co-related with the economy of the country. Due to this reason it is said that stock market is the barometer of a country.