The purposes of stock markets
The stock market provides new possibilities for companies to integrate their business into the international scene. A stock market is an indispensable component of the financial market. The purpose of such an exchange is to accumulate economic resources and ensure the possibility of their redistribution by various market participants performing multiple transactions with securities. In other words, the stock market facilitates the movement of temporarily free funds between investors and shares’ issues bodies. Over the past decade, several countries of the world’s securities markets have undergone evolutionary changes caused by business advancement and globalization of economies. At the present stage of the world financial market development, a significant part of financial resources is brought by securities issuing. Stock markets offer additional or alternative financial sources to the economy at the macro level, continually modifying.
Shares are securities that give ownership of a percentage of the property and profits of an organization. The stock market provides services for buying and selling shares. There are approximately 60 largest stock markets worldwide, 16 of which have a market capitalization of over $1 trillion (Viney and Phillips 44). Market majors such as banks, mutual funds, and small investors can trade in stock markets based on the principle of supply, demand and providing opportunities for long-term investors and day traders. The rapid growth of world trade and international capital movement has affected numerous big financial firms, manufacturing and trading companies to correlate their progress chances with globalization.
Factors Influencing the Stock Market Development:
There are certain factors in the stock market that define the dynamics of its evolution. These days, the stock market’s expansion is affected by the macroeconomic indicators of the national economy’s growth and inter-corporate risks (Barnett and Sergi 134). Besides, environmental factors such as global economic growth, market correlation, interest rates, and oil prices can be considered crucial points in this process (Barnett and Sergi 134). Moreover, fluidity, the number of market actors, including investors and issuers, traded volume are also indicators of financing activity in the stock market, managing its extension (Barnett and Sergi 134). The stock market can be considered a criterion of society’s economic well-being as the financial flows highlight the national and global economy’s structural changes.
Impact of Stock Market on Economic Growth
Several points ascertain the impact of the stock market on economic growth. The first one is volatility; for the economy, a state of flux means that investors perceive it as a situation for short-term employment of funds (Cave et al. 1517). Securitization of the economy suggests an increase in the share of financial assets in securities in the GDP structure. The issue of shares allows companies to attract new strategic investors to their business (Cave et al. 1517). Bonded loans provide an opportunity to receive an additional source of financing (Cave et al. 1517). Trends in stock markets are closely related to the economic dynamics since the principal macroeconomic characteristic – GDP is an indicator defining the total productivity of private and public companies.
By the volume of the stock market, its development can be evaluated from the entire economy’s perspective. Traded volume on the exchange is a result of investment activity. People can trace the cyclical patterns of the inflow and outflow of funds through stock sales in the share market. This is due to the structure of sufficient demand in the national economy and the foreign investors’ capital flow. Concerning companies, capitalization is determined based on shares’ prices; an advance of national companies’ value leads to an increase in GDP (Cave et al. 1517). Even though the existing gap between the real sector of the economy and businesses’ future income may be significant, capitalization for the national economy brings positive outcomes. Corporations receive additional capital that might be used to diversify their business, acquire new assets, technologies, and knowledge.
Development level of a country
Therefore, macroeconomic points create the background and the character of the market. Thus, the same data in reverse macroeconomic conditions perform different results (Cave et al. 1519). During economic growth, an impressive budget surplus, moderate inflation, and high oil prices, the investment opportunity becomes achievable (Cave et al. 1520). On the contrary, regarding opposite circumstances, the inflow of money supply decreases. Consequently, stock markets change following the macroeconomic indicators set (Cave et al. 1525). The investors themselves can determine the dynamics and speed of these changes.
The development of financial markets inevitably leads to
The development of financial markets inevitably leads to the involvement of national wealth and the absorption of unused financial resources. For instance, if a significant volume of resources is involved in the market turnover, it will stimulate a large amount of material and non-material sources to be securitized (Barnett and Sergi 234). This leads to the more effective usage of the national wealth, which points to an increase in GDP per capita (Barnett and Sergi 234). The share exchange reflects the positive and negative aspects of the country’s politics and economy.
The US stock markets
Throughout the post-war period, except for 1989–1990, the United States ranked first globally in terms of equity market capitalization. In the 20th century, the world financial system maintained gold standards as the primary source for capital safety (Pradhan 163). The main accomplishments of the 20th century are the extension in the volume and speed of exchange trade (Pradhan 165). Capital began to move freely among nations, which caused a rise in the number of trading platforms. The number of companies with shares being traded on stock exchanges has decreased by 1.5 times over the past ten years (Pradhan 164). However, their amount still exceeds the number of companies whose shares are listed on stock exchanges in any other country in the world.
The largest American stock exchanges
These days, the US stock market is the leading financial center of the world. The dynamics of the American S&P 500 and Dow Jones indices define the state in foreign stock markets around the globe (Viney and Phillips 456). The US stock market consists of well-known exchanges such as the NASDAQ Stock Market and the New York Stock Exchange. They provide access to some of the most traded assets in companies such as Apple, Amazon, Bank of America, General Electric, ExxonMobil, and Johnson & Johnson (Viney and Phillips 456). These aggregations of buyers and sellers have received their reputation for trading reliable quality stocks.
Causes of the high capitalization and liquidity of the US stock market
The causes for the high capitalization and liquidity of the American stock market are the dispersed ownership structure and the high share of these instruments in the population’s financial assets. There are such factors as a reliable system of state regulation and protection of investors, practical actions against manipulation, and a transparent system of information disclosure by issuing companies (Pradhan 166). About 91 million people hold shares in the United States; this can be performed directly and indirectly, for instance, through pension schemes (Pradhan 166). It amounts to nearly one-third of the country’s residents. Moreover, one-third of the share capital is directly controlled by the people, whereas considering mutual funds can exceed half of the American population.
US companies are characterized by high free float, which is 70–90%, differentiating the US market from Germany, Japan, and China (Viney and Phillips 544). Another reason for the attractiveness of US stocks to investors is the high dividend payout rate (Viney and Phillips 544). Over the post-war period, it amounted to about 50% in the 500 largest companies included in the S&P 500 index, reaching 80% in some years (Viney and Phillips 544). However, in the current decade, it has been noticeably decreasing to 30–35% (Viney and Phillips 544). The coronavirus outbreak has plunged stock markets into severe declines; in some cases, a weekly drop is similar to the 2008 financial crisis.
To sum up, it should be noted that the country’s development level mostly determines the characteristics of the securities market growth. This entails various consequences in terms of the dynamics of exchange rates, the market’s profitability and riskiness, the prevailing participants, and their investment strategies. Most studies confirm that there is the existence of a stable positive relationship between the level of development of the stock market and the rate of economic growth. The financial sector can reallocate capital, which leads to the fact that the state’s economy can gain maximum benefit, being an essential catalyst for change.
Barnett, William, and Bruno Sergi, editors. Banking and Finance Issues in Emerging Markets. Emerald Group Publishing, 2018.
Cave, Joshua, et al. “Do Banking Sector and Stock Market Development Matter for Economic Growth?.” Empirical Economics, vol. 59, no. 4, 2020, pp. 1513-1535.
Desjardins, Jeff. Volatility 101: An Introduction to Market Volatility. Visual Capitalist. 2018. Web.
Pradhan, Rudra P. “Development of Stock Market and Economic Growth: The G-20 evidence.” Eurasian Economic Review, vol. 8, no. 2, 2018, pp. 161-181.
Viney, Christopher and Phillips, Peter. Financial Institutions, Instruments and Markets. 8th ed., McGraw-Hill Education Australia, 2019.