Role of Stock Exchanges in Economic growth of a country.

To understand the role of stock exchanges in economic growth, first we have to understand the need of stock exchanges. Any attempt at raising the standard of living of the people must address itself to the task of producing right type of goods at the right time. This calls for raising vast amounts of financial resources and capital. The corporate form of organization can raise this capital. They do it by issuing various types of securities, i.e. shares and bonds and investors can put their money in these securities. But no one will buy these securities unless there is an organized and secured market. Such a market is called stock market or stock exchange. So, stock exchange is an essential financial infrastructure for any democratic economy.

Stock exchanges in India have a vital role to play in the development of the country. First of all it helps government to raise internal resources for the implementation of various development programs in public sector. Stock exchange as a part of capital market performs an important function in mobilizing and channelizing resources which remain otherwise scattered.

Finance from external sources mainly from investing public can become possible only when an institution like stock exchange provides opportunities for the conversion of scattered savings in to profitable investments with promise of minimum risk and reasonable yield. So, it’s very difficult for a country to mobilize resources without stock exchanges. Stock exchanges provide a market for producers to raise capital which directly or indirectly generates employment to millions of people.

So when we look at stock exchanges in a democratic economy they have multiple roles to play. These may be-

· Raising capital for business

Stock Exchange is a medium for companies to raise capital for expansion. For this they sell shares to investing public in an organized market like stock exchange

· Next it mobilizes savings for investment. Now for the development of an economy, mobilization of capital is very important. When people invest their money in securities, they provide capital for business to grow, which otherwise would have been kept in idle deposits in banks. Now, when business grows, it benefits several economic sectors like agriculture, commerce and industry, resulting in stronger economic growth.

· Next one is to facilitate company growth.

Companies always look for acquisition and takeover to expand their business. A takeover bid through stock exchange is one of the simplest and common ways for a company to grow. Now this helps in economic growth of a country.

· One important thing that stock exchanges provide is what we call, corporate governance.

Companies generally improve on their management standards in order to satisfy shareholder’s demand. Consequently it is alleged that public companies tend to show better management records than privately held companies. There has been considerable slippage in corporate governance on the part of some public companies. Lehman brothers and satyam computers are the recent examples. But having a stock exchange provides governance in this area by penalizing bad management. So, this helps in preventing a sudden market crash.

· Next, stock exchanges provide capital for government for development

Projects.

Government a t various levels for their development projects can borrow money by selling bonds. These bonds can be raised through stock exchanges. When people buy them, they loan money to the government.

· One more important thing that stock exchanges do is being an indicator of the general trends in the economy. At stock exchange, share prices rise and fall depending upon market forces. An economic recession or financial crisis could eventually lead to a stock market crash. Therefore, stock exchange can provide a better view of the future market trends. So that preemptive action can be taken for crisis.