Stock markets are an integral part of all major Western economies. They provide unique services and benefits to corporations, individual investors and governments.
A corporation able to make an Initial Public Offering (IPO) on the stock exchange gains access to a huge universe of investors and a ready supply of new capital for their business. Once listed there is the opportunity for further issuance if needed. Access to the stock markets also facilitates growth by merger or acquisition through share purchases.
Equities have no maturity data and no fixed rate of return. This makes them a riskier investment than money markets or bonds. What equities provide is the prospect of a combination of income and capital gains, plus a superior rate of return. From the 1930's until 2007 an average return of between 8% and 10% per annum has been achieved (depending how you account for dividend payments) compared with around 5% for bonds. The stock market gives the flexibility to invest small or large amounts and the choice of a vast number of different corporations and industries in which to invest.
If individuals keep their savings in cash, or even a bank account, there is little or no benefit to the economy. Investment in stocks, however, is a direct investment in the success of individual businesses and helps promote stronger economic growth.
Although the health of the economy can not be directly correlated with the performance of the Stock Market, it is true that the performance of share prices in general will be a good indication of it's current condition and of the confidence of individuals within that economy.
The regulations required for a corporation's stock to be listed on the Stock Exchange and the ongoing requirements to maintain that listing are a good way to ensure that management standards and standards of record keeping within that corporation are maintained at a high level. There have been notable exceptions, but generally record keeping of publicly quoted companies has been shown to be better than that of private companies.
In addition to corporations, governments themselves may issue bonds that are quoted on the Stock Market to raise money for infrastructure, or other major projects. The stock exchange allows individuals to lend money to their government to fund their programs.
The ratio found by dividing short- and long-term debts by the total assets of the firm (This ratio measures a company's financial risk, showing how much of the firm's property has been financed by debt.) continue reading