How a Well-Regulated Stock Exchange Generates Great Growth
Sustainable development is a mechanism to reduce poverty, increase opportunity and promote equality.
Given the potential of stock exchanges, it is important not only to improve understanding of the role of stock exchanges and how they work, but also to create environments where they work well.
Globally, stock exchanges form the backbone of economic infrastructure and capital. Stock exchanges help businesses raise funds to grow and also provide individuals with the opportunity to invest in such businesses.
Stock exchanges provide order and impose regulations for the trading of stocks. Finally, stock exchanges and all associated businesses create jobs.
Investors use stock exchanges to invest in a company’s future. Allowing the average person to invest in these businesses results in increased wealth which leads to additional economic activity.
Without the business regulations and shareholder protections provided by stock exchanges, few people would be willing to invest in stocks. Due to the surveillance of the stock exchanges, the average person has the confidence to invest.
The wealth of investors increases over time, allowing them to contribute more to the economy.
Developing countries that want a faster pace of economic growth should consider policy changes that will accelerate the development of securities markets and encourage investment from citizens and foreigners.
The best way to achieve this is to remove tax, legal and regulatory barriers. Countries do not need interventionist policies such as tax incentives to stimulate investment.
By removing barriers to the free flow of capital, countries can let market forces act naturally to drive their economic growth and prosperity.
A stock exchange can serve as a barometer of a country’s fiscal health, showing the ups, downs, trends and changes in the national economy.
When stocks fall, spending stops, consumers lose confidence, and a country’s financial condition begins to falter. Conversely, when securities rise, confidence spreads, spending and investment increase.
A country’s mood can rise or fall depending on stock market activity and performance.
Since the securities market is a vote of confidence, a crash can devastate economic growth. Falling stock prices mean less wealth for corporations, pension funds and individual investors.
If stock prices remain depressed for a long time, new businesses cannot obtain funds to expand. Companies that had invested their money in securities will not have enough to pay salaries or fund pension plans.
The government and even local authorities like municipalities can decide to borrow to fund huge projects by selling bonds that are raised through the stock exchange.
When the government gets this alternative source of funds, it will no longer need to raise taxes, giving people more power to invest and consume.
When people dip into savings and invest in stocks, it leads to a more rational allocation of resources.