The stock exchange helps businesses raise money to fuel growth.
The stock exchange is a financial marketplace whose role in the economy is primarily to help businesses finance their operations. Economic growth and development depend in part on securing the necessary financing to fund growth. As a result, businesses secure investor financing through the stock exchange. Among its most important effects, the stock exchange contributes to economic efficiency by encouraging productive money use by mediating the transfer of capital between investors and businesses, fueling business activity and financing growth.
Long-term
Business may have long-term financing needs that might be funded by issuing stock or bonds through the stock exchange. Long-term financing is similar to a long-term loan used to make a large purchase. For a business, a large purchase may include large assets such as machinery or a building. Long-term financing might be necessary to secure the future success and continued operation of the business.
Short-term
Unlike long-term financing, businesses may have short-term financing needs. Raising money for short-term needs can also occur through the stock exchange, where a business may issue short-term debt investments like commercial paper, money markets and short-term bonds. Short-term financing is commonly used to fund salaries and keep the business operating.
Growth
Growth fueled by investor money and confidence helps a business expand into new markets, create new jobs and contribute to the growth of GDP. In turn, the derivative benefits of business growth like employment creation help fuel consumption once people are employed and enjoy a stable financial outlook. This employment and consumption cycle encourages sustained economic activity and stability.
Accountability
The stock exchange promotes good corporate governance through investor scrutiny. When investors buy stocks or bonds in a particular company, the company becomes accountable to the investor, who is now a shareholder in the company. Investors put their money into a particular company's stock because they believe the company is well managed, will be profitable, and therefore may likely make money off the investment. If investors believes the company is no longer likely to be profitable, they may always sell their stock and put the money into another company with a more favorable outlook. This accountability encourages good corporate practices such as financial reporting and bookkeeping, which helps keep the economy stable.
Downturns
Stock exchange activity may indicate the level of business activity in the economy. During an economic downturn, such as a recession, investors might decide that the financial outlook for a particular company is not likely to be profitable. As a result, investors either sell their stock to get their money back to invest in other companies or simply hold on to it until the recession passes. A loss of investor confidence during downturns may limit the amount of money that companies can access for their growth. Without financing, company growth and operations slow or stop altogether. To counter the slowing of financing, companies sometimes cut expenses such as jobs or benefits, or they may close. As a result, the companies' employees may be unemployed and with little or no income for the short or medium term.
