The Role of the Stock Market in Economic Development
The role of the stock market in economic development is primarily to channel capital into businesses. The continuous flow of capital gives businesses the liquidity they need to work and expand. To facilitate the flow of money, stock markets commonly consist of national and regional stock exchanges where companies find investors for their stock. In turn, investors seek the best investment opportunity to generate the highest returns on their capital.
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Opportunity Cost
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Individual investors weigh opportunity cost when they examine the possible losses and gains from all their investment options in the stock market. Generally, individuals put money in stocks believed to maximize returns on their capital more than any other stock or investment alternative. This principle helps channel capital into specific companies, industries, or funds believed to yield the highest return. This in turn supports economic development because investors make decisions based on which stock is likely to generate greater returns.
Efficiency
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On a large scale, investors making investment decisions that maximize their capital help foster efficiency in the economy. As a result of maximization, capital flows on a large scale toward companies judged to be in the best position to manage scarce resources and generate profits. In contrast, companies that are not judged to be profitable and are ineffective resource managers are forced to be efficient or leave the marketplace. This large scale, profit maximizing behavior by stock market investors helps promote business growth, employment and generates wealth.
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Individuals
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When good investment decisions channel money into the most promising businesses, there are tangible economic benefits to individuals. For example, when investors buy stock, they gain partial ownership in the company selling the stock on the market. As a result, the company has funds to finance current operations and future expansion. Therefore, the company maintains its pool of employees who in turn have the money to spend on consumer goods, education and home mortgages, among other types consumer spending.
Businesses
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Likewise, when businesses raise money by issuing securities in the stock market, they are able to finance ongoing business activity and expansion. Generally, when businesses expand, their operation costs increase, which generates derivative economic benefits such as increased revenue for suppliers. Business expansions also commonly generate additional jobs to support the increase in operations. As a result, higher employment rates commonly generate higher consumer spending levels.
Government
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Local, state and federal governments all benefit from the role of the stock market in economic development. Specifically, government benefits from bond issues and increased corporate tax revenue. For instance, a business that grows from raising money in the stock market through the sale of stock generates more income and pays more corporate tax depending on the structure of the corporation. In addition, bonds sold through the stock market help government agencies borrow money from investors in return for regular interest payments to the investor. Money raised through taxation and bonds helps fund government programs, services, roads, schools, and higher education loans, among other spending.
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