Introduction:

Stock exchange plays a pivotal role in the economic development of a country. For this
reason the government, industry and the banks of the country keep on monitoring the
stock market of the country. The stock market is not only important for investors but for
industries as well. According to investopedia, stock market is market where securities,
supplies, derivatives and other financial instruments are traded (Stock exchange
definition, n.d). The main task of the stock exchange is to make sure fair trading and to
ensure that trading is going on in orderly manner. Stock exchanges give companies,
governments and other groups a platform to sell securities to the investing public. By
stock exchange, public develops an investing interest into companies, governments and
other group. They feel secure that the money they are investing is secure. It is important
to know that the stock exchange does not own the money the public invest in them. It is
only a place where stock buyers and sellers meet each other. This process is done by a
broker who is a person or a group who makes a connection between the buyer and the
seller. A share of stock is a share in the company. If someone buys a share of stock, it
means that he or she is eligible to a small portion of the assets and earnings of that
company. Assets include everything the company owns. Buildings, equipment,
trademarks etc. comes into assets category and earnings are all of the money the
company brings in from selling its products and services.

Role of stock markets in economy:

The stock gives the investors an opportunity to take part in the economic growth. Stock
market plays the central role in economic growth. Stock market brings savers and
investors on one side where as companies and the state on the other side. If there was
no stock exchange, the investors and buyers would have to negotiate directly which
would cause a lot of problems for both parties. For example an investor would have to
do a very heavy research about the buyer before giving him his shares. Companies and
the state requires a large sum of capital but the savers and investors can only provide a
limited amount of money, for a small period of time. The stock market provides the best
and well-organized reconcilement of interests between the groups. Savers and
investors can buy and sell securities on the exchange at any time, without directly
affecting the companies. For this reason, the stock market is also known as a circulating
market (secondary market). It is also an issuers' market in which new issues can be
placed (primary market) (The role of stock market, n.d). Stock exchange apart from
being center of primary and secondary market, they have very important role to play in
the economy of the country. Some of them are listed below:

Raising capital for businesses

By stock exchange, the companies are given an opportunity to raise capital by selling
their shares to the public investors. For example suppose a want to raise capital or do
economic reform, the company will contact the stock market and will make its share
available to the public investors. The Stock Exchange provides companies with the

facility to raise capital for expansion through selling shares to the investing public. The
public investors will buy share in exchange of money which will help the company in
raising their capital. A question arises that if a company is in need for an investment,
why dont they borrow money from the bank? The answer is simple. If they take a loan
from the bank, they have to pay it back with interest. Whereas in stock market, the dont
have to give any interest or dont have to pay back at all because the investors will also
suffer if in case a loss happens.

Mobilizing savings for investment

Sometimes money saved at home or kept in bank is idle or either consumed. By stock
market, people are encouraged to invest in companies which can be fruitful for both of
them. When people invest in the shares of a company, the money is mobilized and is
promoted to healthy and beneficial business activity depending on the sector in which
we invest like agriculture, commerce or industry which results in strong economic
growth and higher productivity of companies and firms.

Facilitating company growth

When public invests in company through stock market, the companies take it as an
opportunity to expand its business. Companies start to grow by expanding its product
lines, increase distribution channels, hedge against volatility, increase its market share,
or acquire other necessary business assets. A takeover bid or a merger contract

through the stock market is one of the easiest and most commonly used method for a
company to grow by acquisition or fusion (Bakhsi, 2010).

Corporate governance
A company tries to improve their standard when they see people investing in their
company through stock market. They improve their management and efficiency to those
investors can have a sense of security and satisfaction towards them and they try to
satisfy the demand of these investors by public corporation imposed by public stock
exchanges and the government (Bakshi, 2010). So when the other investors sees that
the loyal investors are investing in a specific company, the also tends to invest in that
company and hence results in better capital and hence better economic results.

Creating investment opportunities for small investors

If someone wants to open a business they require a large capital. Sometimes people
are not able to open a business because they cant afford it. In stock exchange, its the
opposite case. Stock exchange does not depend on the amount of money a person or
companies have. They are open to both small investors and big investors. In stock
market, a person can invest the amount of money he can afford. Therefore it is easy for
small investors to own shares of the same company in which big fishes are investing.
So therefore when many of the small investors invest in a company, it automatically
increases the capital of the company and hence results in better economic growth.

Government capital-raising for development projects

Sometimes government needs to borrow money to finance various projects.These
projects maybe infrastructure such as sewage or it might be the construction of new
houses or it can be of the production of electricity. They do this by selling another
category of securities known as bonds. These bonds can be raised by stock exchange
in which public investors comes and buys them which means that they are loaning
money to the government. By doing this government is able to provide better facilities to
its people and when people sees that by investing money into the stock exchange is
giving them facilities in return, they tend to invest more (Frankfurt, n.d).

Barometer of the economy

The share prices at the stock exchange keep on fluctuating which mainly depends on
market forces. When the national economy and the company is stable, the share prices
remain stable whereas in case of inflation, recession can be the reason of stock market
crash. Stock index is used for this purpose as the general trend in the economy.

Central functions and responsibilities of a stock market:

Making cost-effective trading platforms.

Bundling of liquidity by concentrating supply and demand

Guaranteeing the greatest potential transparency for investors

Providing info on prices and capacity. (Frankfurt, n.d)

Economic Effects of the Stock Market

1. Wealth Effect
The principal effect is that individuals with shares will see a fall in their fortune. In the
event that the fall is noteworthy it will influence their fiscal viewpoint. On the off chance
that they are losing cash on shares they will be more reluctant to use cash; this can help
a fall in consumer spending. On the other hand, the impact ought not be given an
excessive amount of significance. Often individuals who purchase shares are ready to
lose cash; their spending patterns are normally free of share prices, particularly for
fleeting misfortunes. The fortune impact is more unmistakable in the lodging business.
2. Effect on Pensions
Anyone with a private annuity or investment will be influenced by stocks. Pension funds
contribute a huge a piece of their trusts on the stock exchange. Consequently, if there is
a genuine fall in share price, it diminishes the worth of annuity trusts. In the event that
share prices fall excessively, pension funds can strive to meet their guarantees. The
imperative thing is the long haul developments in the offer costs.
3. Confidence
Regularly share price value developments are impressions of what is going on in the
economy. E.g. a dread of a recession and global slowdown could result in share costs
to fall. The stock exchange itself can influence buyer trust. Terrible features of falling
share prices are alternate elements which debilitate individuals from using. On its own it
might not have much impact, yet joined with falling house costs, offer costs could be a

disheartening component. In any case, there are times when the share trading system
can show up out of venture with whatever remains of the economy.
4. Investment
Falling share costs can make trouble for firms capability to raise back on markets.
Firms who are growing and wish to acquire frequently do so by issuing more imparts it
gives a minimal effort method for getting more cash. Then again, with falling offer costs
it gets to be substantially more troublesome.
5. Bond Market
A fall in money markets makes different speculations more attractive. Individuals may
move out of shares and into government bonds or gold. These speculations offer a
superior return in times of lack of determination. Despite the fact that now and then
money markets could be falling over concerns in government security markets (e.g.
Euro monetary emergency)

Some famous stock exchange around the globe

New York stock exchange (NYSE):
New York stock exchange, which is considered as the best stock exchange in the world,
is located in the most famous Wall Street, New York has the facility of physical buying
and selling of stocks. New York stock exchange also has the facility of online
transactions. Large, medium and small cap companies are listed in the New York stock
exchange. The current market capitalization of NYSE is more than 14,000 Billion dollars
(Top ten stock exchanges, n.d).

Tokyo stock exchange:

Having the headquarters in Tokyo, Tokyo stock exchange is the third largest market in
the world. It has Market Capitalization (2011, USD Billions) 3,325; Trade Value (2011,
USD Billions) 3,972. It had combined 2,292 large, mid-sized and startup companies.
The London Stock Exchange and the Tokyo Stock Exchange are developing jointly
traded products and share technology (Top ten stock exchanges, n.d).

Shanghai Stock Exchange:

It is the worlds 5th largest stock market by market capitalization. Unlike the Hong Kong
Stock Exchange, the SSE is not entirely open to foreign investors. The securities listed
at the SSE include the three main categories of stocks, bonds, and funds. Bonds traded

on SSE include treasury bonds, corporate bonds, and convertible corporate bonds. The
largest company in SSE is PetroChina (market value 3,656.20 billion) (Top ten stock
exchanges, n.d).

KSE - Karachi Stock Exchange

KSE stock is a Leading Stock exchange of Pakistan. KSE has many local as well as
international entries. KSE is the second oldest stock exchange in South Asia. In 2002
KSE stock exchange was declared as the "Best Performing Stock Market of the World"
by Business Week and USA Today, the US newspaper termed KSE Karachi Stock
Exchange as one of the best performers in the world.

Conclusion:
Stock market plays an important role in the development of any economy. They helps to
raise the capital. People can invest in stocks at any given time no matter the amount
invested. Sometimes it helps government for funding of different infrastructure and other
projects. When investors invest in a specific company through stock markets, their
capital is raised and hence the company tries to improve their standard by expanding
their business and improving their management etc.

References:

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Frankfurt, B. (n.d.). Brse Frankfurt (Frankfurt Stock Exchange). Brse Frankfurt. Retrieved
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