The Role of Stock Exchange in Economic Development

1. Raising Capital for Businesses
The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.

2. Mobilising Savings for Investment
When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds which could have been consumed or kept in idle deposits with banks are mobilized and redirected to promote commerce and industry.

3. Redistribution of Wealth
By giving a wide spectrum of people a chance to buy shares and therefore become part-owners of profitable enterprises, the stock market helps to reduce large income inequalities because many people get a chance to share in the profits of business that were set up by other people.

4. Improving Corporate Governance
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of the shareholder. It is evident that generally, public companies tend to have better management records than private companies.

5. Creates Investment Opportunities for Small investors
As opposed to other business that requires huge capital outlay, investing in shares is open to both the large and small investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides an extra source of income to small savers.

6. Government Raises Capital for Development Projects
The Government and even local authorities like municipalities may decide to borrow money in order to finance huge infrastructural projects such as sewerage and water treatment works or housing estates by selling another category of shares known as Bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them. When the Government or Municipal Council gets this alternative source of funds, it no longer has the need to overtax the people in order to finance development.

7. Barometer of the Economy
At the Stock Exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability. Therefore their movement of share prices can be an indicator of the general trend in the economy.

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