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Lancelot Tucker
Lancelot Tucker
Articles (104) 

Is the Stock Market Helping the U.S. Economy Grow?

April 20, 2015

The study of a country’s stock market can help one assess the state of economic development and growth of that country. Both financial development and economic growth are inextricably interlinked with each other. It is very rarely observed that a country with poorly performing financial institutions achieves an impressive rate of economic growth. There is a strong positive causal relationship between the two.

Technological advancement is the cardinal factor that enables corporations expands their operations and grows beyond a geographical location. Usually corporations require huge amounts of capital to finance their growth and expansion projects. No project can be financed using only the amount of cash that a company has in its bank accounts, cash reserves or invested in short-term securities. The primary sources of finance available to any company are debt and equity. Finance from the latter source is raised by offering stocks for sale on the stock market. The stock market is an important source of finance for publicly traded corporations. Companies operating in countries with well-developed and established financial markets do not find expansion and growth as difficult as operating in countries with unsophisticated and under-developed financial markets.

The prevailing stock prices in an economy that is reflecting the discounted value of the future cash inflows that an investor expects to earn within the next year. During times of economic prosperity and development, stock prices tend to spike. The rising stock prices not only reflect the level of investor confidence but also give an idea as regards to the future economic growth of a country.

The relationship between the financial markets and real economic activity was brought to light by Gurley and Shaw. The major difference between developed and developing economies, as maintained by them, is that the former has modern and firmly developed financial markets and institutions. They believed financial market to be extremely important in the accumulation of physical capital. Researchers succeeding Gurley and Shaw developed the idea further and concluded that a country’s per capita income and financial market performance were positively correlated.

If we look at the U.S, the world’s biggest economy with an annual GDP of over $16 trillion, we will observe that its stock markets are highly sophisticated and modern. As of January 31, 2015, the New York Stock Exchange was reported to be the world’s biggest stock market in terms of market capitalization, which stood at $19,223 billion. The National Association of Securities Dealers Automated Quotations (NASDAQ), another U.S. stock exchange, with a market capitalization of $6,831 billion, followed NYSE. Now there are 15 stock exchanges operating in the U.S.

In the light of historical data and modern day examples, we have ample reasons to support the notion that stock markets do help economies develop and grow and that there exists a positive correlation between the two. Stock markets help corporations raise finance that is much needed for development and growth projects and essential for companies to gain technological prowess. The U.S. stock market, by enabling corporations to raise finance, is helping the economy grow by a great deal.

About the author:

Lancelot Tucker
Lancelot Tucker is a freelance writer living in Jamaica. He often writes about finances and other business based articles.

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