The Useful..ish Stock Market
- By Yasser Aboraya -
Living in an age where you go out of some form of financial crisis just to experience the next, you must’ve noticed that the stock market is one of the main topics that people talk about A LOT! But is the stock market really that detrimental to the continuity of a thriving economy? Is it really a strong indicator of financial stability?
To answer these questions we must first understand the different roles of any given stock market. For starters, stock markets are useful in raising capital for businesses through trading shares publicly. They are also useful in opening up higher risk – higher return investment opportunities to investors. Another very important benefit of stock markets are the stringent corporate governance rules and need for transparency in order to be listed which - in theory - should improve free-market operations. Last but not least, stock markets makes it possible for governments to raise capital through the issuance of treasury securities – you probably know them better as bills, bonds, and sometimes notes.
With this in mind, we can easily say that the stock market could be regarded as a sort of a barometer; giving-off an EXTREMELY general signal on the trend of the economy and there is a very good reason as why it should be considered general.
All investors know very well that stock markets have some sort of a cycle (more like the business cycle) which is why there are the occasional fluctuations. However, these fluctuations, which result from the day-to-day activities of the stock market, do not necessarily depict the actual developments in the economy as a whole and there are some good reasons to believe so. First off, stock markets are really volatile against $h!^y news and lets be honest here for a second; we live in an age where viral BS rumours are plenty. A second issue with stock markets is the fact that it is sometimes manipulated by either governments or “large-enough” investors. Don’t forget also about the good ol’ act of insider trading and moral hazards.
All in all the stock market could provide an expectation
of economic trends but in the most generic and basic terms, it does not directly contribute to GDP growth, but actually it’s the other way around. There are other more promising methods of observing economies through noticing the strength of the domestic banking system, level of industry, trade, balance of payments, etc… and then the stock market, but not the stock market alone.