What Role Do Stock Exchanges Play In National Economies?

Stock exchanges perform an important role in a national economy. They encourage investment by providing places for buyers and sellers to trade securities. This investment, in turn, enables corporations to obtain funds to expand their businesses.

Corporations issue new securities in what is known as the primary market, usually with the help of investment bankers. This investment bank purchases the initial issue of the new securities from the corporation at a negotiated price and then makes the securities available for its clients and other investors. This is called an initial public offering (IPO).

In this primary market, corporations receive the proceeds of stock sales. After this initial offering, the securities are bought and sold in the secondary market. The corporation is not usually involved in the trading of its stock in the secondary market.

Therefore, stock exchanges will essentially function as a secondary market. By providing investors the opportunity to trade financial instruments, the stock exchanges support the performance of the primary markets. This arrangement makes it easier for a corporation to raise the funds that they need to build and expand their businesses.

Although corporations do not directly benefit from secondary market transactions, the managers of a corporation closely monitor the price of the corporation’s stock in secondary markets.

Reasons for this concern involves the cost of raising new funds for further business expansion, the perceived 'strength' of a company (and whether it is vulnerable to a takeover) and of course, their options and bonus packages!

As might be recognised, the central role of a capital market in a developed economy will typically be protected by national leaders and politicians. The jobs created, GDP represented and general impact of financial services are too important to lose. It might be worth adding, cynically, that financial services firms and investment banks typically are large contributors to election campaign funds.

Just say no

A great example of this happened in December 2011 when the UK Prime Minister, David Cameron, caused significant problems at an EU summit in Brussels. Mr Cameron chose to opt out of any discussions of a Financial Transaction Tax for the EU. The implications of imposing this tax in the UK financial markets was too risky to London's position as a global business and money centre.

London and The City do have very major roles to play in Britain's national prosperity, but few within the EU really thought that he would use his powers to hold back the legislation. This was a very real demonstration of the influence that financial capital has.

In the UK, London has several hundred thousand jobs in the financial services sector. Each of those employees pays tax and National Insurance. Each of their employers pays some form of tax and is involved in the wider economy ensuring that their combined impact would be very noticeable should it leave.

How green is the grass?

Not everything is rosy though. Major financial centres such as New York, London, Hong Kong and Singapore are notorious for the cost of real estate. These are very expensive cities to live in and that is partly because there are many thousands of people earning above average wages in financial services and investment banking. These people are able to bid up the prices of residential property making it unaffordable to most of the rest of society.

It is also worth pointing out that people and companies in high finance are notorious for working hard to cut their tax bills. Needless to say, they are typically the people that can reduce their taxes the most through clever strategies that normal people would find difficult or impossible to emulate. As is often suggested, there is one rule for the rich and...

To read more background information about the working of a stock exchange, please visit the following pages:

Stock Exchange Information

What Is An Efficient Capital Market?

Investment Institutions On The Stock Exchange

Executing A Trade On The Stock Exchange

Why Are There So Many Stock Exchange Scandals?

Increasing Regulations - The Sarbanes Oxley Act

How Big Should Stock Market Bonuses Be?

Investment In The Stock Exchange

Learn About The Important Role Of Stock Rating Agencies