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The barometer of economic health

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For a country, sustainable economic growth and well-being is something to aspire for. Many societal issues can be addressed with a developed economy, given that the public and private sectors do their parts. The alleviation of poverty, adequate health care, public security, and even the cultural vibrancy of a nation all depend on a stable and growing economy.

The public sector’s job is obvious. It needs to enact smart policies that benefit business, enforce equitable taxes, and encourage investments. The contributions of the private sector rely on its enterprise, in the stock exchanges and capital markets.

A mobilized economy is a healthy economy and a stock exchange is very efficient at mobilizing money: Investors invest their money to companies in exchange for the chance of future profit, while the companies gain more capital to expand their businesses.

“Stock markets are, first and foremost, financial institutions established to help businesses and entrepreneurs come together to buy, sell and trade shares for the purpose of capitalizing enterprises in need of cash infusions,” investment research firm Zacks wrote on its Web site.

“Were it not for stock exchanges, entrepreneurs would be left to their own devices to find investors, and consumers could wind up at the mercy of unlicensed and unregulated financial products with no oversight.”

The growing number of exchanges worldwide could stand as proof of their effectiveness. According to the United Nations Conference on Trade and Development in a joint report with the World Federation of Exchanges, as of 2016, there were nearly 50,000 companies listed on 81 exchange groups around the world, with a combined market capitalization of approximately $70 trillion.

“The number of countries with a stock exchange has grown dramatically over the last 40 years — from just over 50 in 1975 to over 160 in 2015. This increase is partly attributable to a growing consensus about the role of stock exchanges in promoting economic development,” Nandini Sukumar, CEO of The World Federation of Exchanges (WFE), wrote.

These listed companies, according to “The Role of Stock Exchanges in Fostering Economic Growth and Sustainable Development” report, range from small and medium-sized companies with tens of millions in market cap to large corporations with the market cap of billions.

“The companies listed on stock exchanges come from all economic sectors: services, manufacturing, mining and information technology. They generate revenues that pay salaries, buy goods and services from other companies, pay taxes and return dividends to shareholders. They are also significant employers: WFE estimates suggest that the 24,000 companies across just 26 of the 55 WFE’s equity market exchanges employ over 127 million people,” the report said.

For this reason, stock markets are typically used as a barometer for the economic health of a country. Zacks Investment Research wrote that the ups, downs, trends and shifts that take place in the stock market act as the “the benchmarks of a society’s financial infrastructure”.

“The direct effect of stock market activity can impact a nation’s economy in multiple ways. Stocks fall, spending stops, consumers lose confidence, and a nation’s financial state begins to falter. Conversely, stocks rise, confidence spreads, spending and investments grow. A nation’s mood can rise or fall on stock market activity and performance, which shows how important the role played by a stock exchange can be in a society’s social and fiscal fabric,” the company added. — Bjorn Biel M. Beltran