Stock exchanges play a vital role in the functioning of the economy by providing the backbone to a modern nation's economic infrastructure. Stock exchanges help companies raise money to expand, hire more qualified staff and repair or replace equipment. They also provide individuals the ability to invest in companies.
Stock exchanges provide order and impose regulations for the trading of stocks, helping decrease fraud, according to the Corporate Finance Institute. Finally, stock exchanges and all of the companies that are associated with the stock exchanges provide hundreds of thousands of jobs.
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Promotes Business Expansion
Stock exchanges provide companies the ability to raise capital to expand their businesses, explains FX Empire.com. When a company needs to raise money they can sell shares of the company to the public. They accomplish this by listing their shares on a stock exchange. Annual reports help investors analyze the performance of companies listed on an exchange.
Investors are able to buy shares of public offerings and the money that is raised from the investors is used by the company to expand operations, buy another company or hire additional workers. All of this leads to increased economic activity which helps drive the economy.
Promotes Widespread Investing
Stock exchanges allow any person to invest in the greatest companies in the world, using stockbrokers, trading websites and other options. Investors, both large and small, use the stock exchanges to buy into a company's future. Investing would not be possible for the average person if there was not a centralized place to trade stocks.
The ability for the average person to visit stock market websites and invest in companies leads to increased wealth for the investors. This increased wealth then leads to additional economic activity when the investors spend their money.
Increased Investor Class
The stock exchanges provide order and regulation to the process of stock trading. Without the regulations and the shareholder protections that the stock exchanges provide few people would be willing to invest in stocks. Because of the oversight of the stock exchanges the average person has the confidence to invest in stocks and this leads to more people become a part of the investor class. The investors' wealth grows over time, which allows them to contribute more to the economy.
Direct Job Creation
The stock exchanges and all of the companies that serve the stock exchanges such a brokerage firms, investment banks and financial news organizations employ hundreds of thousands of people. Most of the jobs related to stock exchanges are well paying and career orientated jobs. As a result, the employees of these firms are able to help spur economic activity.
Promotes Investor Confidence
Investors will be more likely to buy securities if they know the companies they are trading are overseen by a regulating body. If the stock exchanges do not fully carry out their duty of overseeing the stock trading process the investing public will lose faith in the fairness and safety of the stock market.
If this happens then all of the economic activity that the stock exchanges create will decrease and this will lead to an overall drop in economic activity. The stock exchanges must be sure that investors are not taken advantage of and that investors continue to have confidence in the system the stock exchanges created.