Have you ever wondered why stock market exists? I always did but never thought that stock markets provide a boost to the whole economy. Let me explain how it does the same?
Need for Stock Exchanges
Stock exchanges are nothing more than a place where trades are executed. You can consider it as a marketplace where a seller and a buyer meet and do trade. In this era of computers, every transaction is facilitated electronically only.
How it is beneficial for Economy?
When any company want to raise money for its expansion or want to provide an exit to its early investors they raise money from the public. Public (investors) always invest their money to create wealth for their future. In fact, equity is the best asset class which can protect one’s money from inflation.
Raising capital is good but what is a need to stock exchanges?
Now you must be wondering if an investor invests his money then why we need a stock exchange. A stock exchange provides a way to transact so that an investor who has previously invested in the company through IPO can get an easy exit. So this means any investor who has invested his money can exit from his investment anytime. This also applies the other way. Any prospective investor now can invest in the company by buying shares via stock exchanges.
The stock market also allows foreign investors to participate in the growth of the economy. Foreign investors participate in the stock market to create wealth. Generally developing economies provide better investment opportunities than developed ones.
Participants in stock markets
On a broader level there are 3 types of participants in stock markets.
- Retail Individual Investor (RII): These are investors like you and me. They usually invest in small quantities but there is not limit for individual to invest.
- Domestic Institutional Investor (DII): These are represented by domestic fund houses such as Mutual Funds. They usually invest in large amount in various companies.
- Foreign Institutional Investor (FII): These are some high worth foreign fund houses and investors. They also invest in large amounts in various companies.
I hope this post has been helpful to you. Happy Investing.