The stock market refers to the public market where stocks are issued, purchased, and sold over the counter or on a stock exchange. A stock market, equity market, or share market is an aggregate of buyers and sellers of stocks (also known as shares), which reflect ownership claims on enterprises. These securities may include those listed on a public stock exchange as well as those traded privately.
Stock markets influence economic activity by generating liquidity. The liquid financial market was a key enabler of most of the early breakthroughs that defined the early stages of the Industrial Revolution. Companies have permanent access to funds obtained through equity offerings. Liquid markets facilitate longer-term and more lucrative investments, which enhances the possibilities for long-term economic growth and optimizes capital allocation.
Although the NSE is India's largest stock market by volume, the BSE is the country's oldest stock exchange. Both exchanges strive for the order flow that drives innovation, cost savings, and market efficiency. Currently ranked as the eleventh largest stock exchange globally, the BSE's market value is estimated to be close to $1.7 trillion. Over $1.65 trillion is thought to be the NSE's market capitalization.
The Stock Market's Impact on India's Economy
Stock price fluctuations have a significant impact on a variety of economic aspects, including consumer spending and investment. Furthermore, the stock market, like the economy, is influenced by a variety of factors.
Listed below is the role of the stock market in the Indian economy:
• Wealth Effect
Individual stock price swings contribute to the market's volatility. Market volatility has an impact on firms and consumers as prices rise and fall.
During a bull period, stock prices rise. It often enhances general economic confidence. Similarly, consumer spending grows as people become more positive about the economy and buy more products and services. Businesses that provide these items and services begin to create and sell more.
Furthermore, a bigger number of investors may enter the market, driving prices even higher. As a result, strong stock market movements can help drive economic growth. However, this isn't always true.
A gain in the stock market does not necessarily coincide with economic development. In 2021-22, stock markets routinely achieved all-time highs, and millions of new Demat accounts were established, while GDP growth dropped in practically every quarter of the fiscal year. This was due to the epidemic.
• When stock markets fall
In contrast, when stock prices decline over an extended period of time (known as the bear phase), the effects are often negative.
Individuals may lose their optimism when news stories about price decreases cause market panic. As a result, investors who lose money are hesitant to spend more or shift to lower-risk investments, resulting in a decrease in consumer spending.
• Influences pension fund
Stock market swings influence everybody with an investment trust or a private pension, even if only indirectly. Many pension plans invest heavily in stocks; a sharp and sustained drop in prices can have a significant impact on the value of these assets.
This also suggests lesser future rewards. Furthermore, households will get less income from pensions, discouraging them from spending and saving more money.
• Has a positive impact on the bond market
A stock market meltdown typically makes alternative investment options more appealing to investors. As a result, people can shift their investments away from stocks and toward bonds or gold. In reality, these financial tools have been shown to provide better returns during moments of uncertainty.
Importance of the Stock Market for the Indian Economy
The stock market is crucial to the Indian economy in the following ways:
1. Because stocks have many buyers at any one moment and are easily convertible to cash, they are regarded as liquid assets.
2. Bond investors who own sovereign gold bonds, for example, can sell their holdings through stock exchanges before the bonds mature or go into lock-in term.
3. The availability of capital affects a nation's ability to industrialize. The public's ability to invest directly in corporations through stock markets makes this possible.
4. An investor can purchase an ownership share in a firm by purchasing stock in that company. It gives them a feeling of inclusion inside the business.
5. Thanks to technology, stocks are readily bought and traded. These days, there are several smartphone apps available for this use. Purchasing or selling shares in a certain corporation is a simple process.
Conclusion
In conclusion, the growth of an economy is significantly influenced by the stock market. It facilitates the flow of capital into the economy's main economic sectors. Thus, it is possible to eradicate the capital shortage in key industries. Investors profit from planned investments in the stock market as a result. People in our immediate vicinity frequently warn us about some risk, but the advantages outweigh that. Despite having a sizable population, less people in India are actively participating in the stock market than is necessary. Young investors should be encouraged to do this by the government by offering them perks like reduced capital gains taxes, among other things. This will assist in creating an engaged stock market, which will benefit the business community.
