The size of the world stock market or equity market is more than US$55 trillion and the total derivatives market has been estimated at about $850 trillion at the end of December 2010, 12 times the size of the world economy. The enormous size of the value of stock market simply justifies the economic magnitude and diversity of the stock market. The stock market has been playing a very significant role in the economy of a country since the 12th century and has flourished the global economy in the 21st century. Virtually every developed, developing and underdeveloped economy has stock markets handling billions of dollars, trading of stocks of listed companies throughout every business day. The world's largest stock markets are in the United States, United Kingdom, Japan, India, China, Germany, France, South Korea and the Netherlands. The stock market is one of the most important sources for companies to raise money as "share capital" from individuals and institutions. This allows businesses to be publicly traded, or raise additional financial capital for balancing, modernising, reconstruction or expansion (BMRE) by selling shares of ownership of the company in a public market. This is an attractive feature of investing in stocks, compared to other, less liquid investments such as real estate. Some companies actively increase liquidity by trading in their own shares. A stock market provides a central location for investors to come together to buy and sell shares in companies. These transactions take place for listed companies that have to make public announcements of profit, loss and revenue figures. The individuals who own shares of these companies are its shareholders and they are entitled to a yearly dividend set by the company. The stock market has two main segments - the primary market and the secondary market. New issues of shares in a company, or initial public offerings (IPOs), are dealt with in the primary market, while existing shares can be bought or sold in the secondary market. Most of the daily trading volume comes from the secondary market. A stable stock market indicates healthy trading activity and strength in the country's economy. Rising prices of stocks and other securities are indicators or predictors to the level of economic growth. The performance of the stock market can also be seen as a barometer of public sentiment, and conversely, the general perception of investors about the economy can also influence the stock market significantly. A fall in stock prices indicates pessimism among investors and an expectation of subdued industrial activity in the near future. Any uncertainty in the country, like an impending change or deviation in the policy and strategy of the government, central bank and other statutory bodies, political instability, can also subdue prices in the stock market. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice-versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behaviour of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the ultimate aim of all central banks. The economy can benefit stupendously from a stock market that is properly regulated, transparent, and allows investors to conveniently buy and sell stocks to earn returns. A stock exchange market fulfils two primary purposes: (a) it encourages public participation in private business ventures. Entrepreneurs with good business ideas can raise huge amounts of capital by launching a public issue of the company's shares in the primary market; (b) through the stock market investors get the opportunity to share the success of large institutions that have the expertise to do well in their ventures. This is a universally acceptable unique and economically viable system that paves the way for investing the idle money and small to medium size savings of the mass people in the manufacturing or commercial companies; thus provides goods and services and employment to the economy.
The stock market is supposed to ensure through the takeover mechanism that past investments are also most efficiently used. Theoretically, the threat of takeover is expected to provide management with an incentive to maximise firm value. The presumption is that, if management does not maximise firm value, another economic agent may take control of the firm, replace management and reap the gains from the more efficient firm. Thus, a free market in corporate control, by providing financial discipline, is expected to provide the best guarantee of efficiency in the use of assets. Similarly, the ability to effect changes in the management of listed companies is expected to ensure that managerial resources are used efficiently. Efficient stock markets may reduce the costs of information. They may do so through the generation and dissemination of firm specific information that efficient stock prices reveal. Stock markets are efficient if prices incorporate all available information. Reducing the costs of acquiring information is expected to facilitate and improve the acquisition of information about investment opportunities and thereby improves resource allocation. Stock prices determined in exchanges and other publicly available information may help investor make better investment decisions and thereby ensure better allocation of funds among companies and as a result a higher rate of economic growth takes place.
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