The Role of the Stock Exchange in the Economy

The stock market plays multiple roles in the economy of any nation.

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You may be surprised to discover the number of stock markets blanketing the globe. In countries around the world, stock exchanges are being used to help businesses raise capital and give investors opportunities to back new and established enterprises. There is no geographical limit or bias to the stock market,t which means that individuals from a diverse array of countries can use stock markets to build wealth and invest responsibility. By any standard of measure, the functionality and utility of the stock market is universal.

History of the Marketplace

The first stock markets were established in 17th century London coffee houses. In place of the sleek electronics and frenzied trading floors typical of today’s market, folks interested in owning commercial shares of businesses came to places like Jonathan’s Coffee House. There, innovators such as John Castaing posted stock and commodity prices for “marketable securities in London,” according to the London Stock Exchange’s historical record. This was the “earliest evidence of organized trading,” moving from coffee houses to an actual exchange on March 3, 1801.

Raising Capital

Stock markets are, first and foremost, financial institutions established to help businesses and entrepreneurs come together to buy, sell and trade shares for the purpose of providing capital to enterprises that need it. Were it not for stock exchanges, entrepreneurs would be left to their own devices to find investors, and consumers could wind up at the mercy of unlicensed and unregulated financial products with no oversight. Emerging from the stock market system are unique financial terms and concepts including initial public offerings, or IPOs, an international acronym for new business stock introductions.

Servicing Investors

Another role of stock markets is to act as an intermediary for large and small investors seeking to make money outside the realm of standard banking institutions. The role of a stock exchange in an economy is to maximize return on savings that might otherwise languish in static bank accounts with low returns. Stock exchanges promise and often deliver higher profits, and in return, investors receive measures of assurance, diverse opportunities and flexibility. Further, a stock exchange offers investors assurances via formal oversight on investments.

Indicator of Health

A stock exchange can serve as a barometer of a nation’s fiscal health, broadcasting the ups, downs, trends and shifts of the domestic economy. According to financial website UpDown’s Investment Education Center, the relationship between a society and its stock exchange is so deeply embedded that analysts can influence both the domestic economy or the stock market it relies on by signaling optimistic outlooks for even just one of the two.

Financial Accountability

Sophisticated financial market systems require credibility and accountability if they are to function on behalf of businesses and investors as interested in ethics as they are in profits. For this reason, a stock exchange benefits from a formal structure upheld by rules, laws and regulations. Management and operational standards set by governments, bureaus and agencies overseeing stock exchange operations add authority and oversight to the institution, giving stockholders, investors and businesses checks and balances necessary for investor confidence.

Economic Effects

The direct effect of stock market activity can impact a nation’s economy in multiple ways. Stocks fall, spending stops, consumers lose confidence and a nation's financial state begins to falter. Conversely, stocks rise, confidence spreads, spending and investments grow. A nation’s mood can rise or fall on stock market activity and performance, which shows how important the role played by a stock exchange can be in a society’s social and fiscal fabric.

Expanded Diversity

If one of the stock market’s roles is to bring together like-minded investors, exchanges also serve as fiscal melting pots, giving minority businesses an opportunity to place shares of new company assets before potential stakeholders who might not otherwise learn about diverse new products were it not for the exchange. Few economies can hope to flourish without infusions of new ideas, systems and opportunities -- all represented by cash -- which is why this confluence of financial needs and wants regularly merges on the floor of a vibrant stock exchange.