Readers Question: Hi please I will like you to help me on how stock exchange can help in increase in GDP of an economy?
The Stock exchange is a way for companies to raise finance through issuing shares. For example, if the company is valued at £400 million. A company could sell £199million shares by selling 49% of its shares. It could then use the £199 million for investment (without losing control of the company)
The stock market is a useful way for companies to borrow money when they are not making any profit. People may be willing to buy shares even without a dividend if there is the prospect of capital gains in the future.
Companies can also issue share issues, when other sources of finances are limited. For example, recently A big British Bank (I think Bank of Scotland) issued a share issue to help deal with the credit crisis.
In the UK, the stock exchange and financial sector in the City is a major provider of income and jobs. Earnings in this sector have helped to increase the affluence of the UK economy, especially in the south east.
Movements in share prices can also influence the economy. Rising share prices can create a wealth effect. A stock market crash, can have the opposite effect.
The other function of the stock exchange is that it is often used by pension and investment funds as a target for some of their investments.