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How Stock Market benefits Economy – Free Guide 2021

Stock Market has earned people fortunes. Innumerable people have earned millions & billions by investing in Stock Market. On the same window, numerous lost everything. People have suffered such losses that have been impossible to recover. The point is, anyone who has ever invested in the stock market always gets something, whether it is a profit, loss or a lesson to learn. Well, that is all on a personal/individual level. But do you know how the stock market contributes to a Country’s Economy? No? Don’t worry, we got you. 

The Health of the Economy is Generally measured by GDP (Gross Domestic Product), which is the sum of values of all the goods and products sold in the market. To get more accurate numbers on GDP, you can subtract inflation from GDP. 

The GDP of a country is a measure that determines whether the country is going in a forward or a backward direction. There are many factors that affect the GDP, and if you look closer, you’ll find a link to Stock Market pretty easily.

Some of the factors that affect GDP are:

gdp

1) Demand And Supply.

2) Quality Life.

3) Employment rate and Poverty.

4) Net Exports.

5) Government Spending.

6) Personal Consumption.

7) Business Investment.

8) Better Utilization of Resources.

Moreover, if you’d like to read more about GDP and Recession.What Is Recession? Recession Useful Guide 2021

However, let’s get back to stock markets, shall we?

How does Stock Market handle these factors?

Stock Market

The stock market has huge potential to handle all these factors. In the long run, the Stock market and economy are aligned, which means if the economy is doing good, then the stock market will also reach heights, and if the economy is going down, people will lose their confidence, and the market will also go down. The same is the case vice versa. You can think of the stock market as any other market. When you buy something, the demand for that product increases, and when the demand increases, the supply of the product also increases.

This, in conclusion, leads to an increase in cash flow. As in, when the items are sold and bought, the cash flow will continue to increase.

Any Nation’s Economy is highly dependent on Business Investments and Operations because of the obvious reasons like:

1) Increase in Employment Rate

2) Infrastructure Development

3) Taxes and Revenues from Operations.

4) Overseas Money benefitting Currency Exchange.

5) Business Competition leads to Better Quality Products.

6) Better Opportunities for Local Dealers and Vendors.

7) Increase in Earning.

How does the stock market work?

Suppose you have a company that is performing well but to scale it up, you need capital. After all, you will need money to buy/rent land, machinery, labour, raw material etc. So, what you can do is that you list the shares of your company in the Stock Exchange Market. Whoever will buy your share will pay you some price in exchange for equity ownership in that company. That person will become the shareholder of that company, and you will get the money to further operate your business or use that money to scale it up.

So, you understand how your money gets invested in a company and how a company collects the capital it needs for its expansion. Well, when the company expands, it will require further resources like raw material, labour, electricity, transportation, land etc., which opens up many employment opportunities for the farmers, workers, engineers, etc. It also generates many business deals with other vendors for raw materials like oil, gas, electricity, cement, wires etc. 

To Sum up –

 In Conclusion, it will increase the Cash flow from the company to local people, which will further boost up earnings and potential of other businesses.

Let’s take an example here, and you must have heard of a company, “TCS” (Company of TATA’s group), well it is a giant Indian company with a market capital of 13 trillion Dollars. It is one of the largest Recruiters and Employment providers in India. It also is a charitable company. But do you know even a company like TCS listed its shares in the stock market in its early days?

The motive was to generate capital from the investors (Retailers or Big Institutions). The generated capital is then used to perform operations all over the country and globe. With the constant growth of the company, TCS has provided jobs and earnings to a million people. 

Stock MArket Benefits

Stock Market beats Inflation.

When people start earning, the cash flow increases in the market. This leads to an increase in purchasing power, which further boosts the demand and supply cycle of the nation. And we know that ‘Demand and Supply’ is what makes the economy of the nation. You get the gist, right?

What you read till now, it’s just how the stock market increases the cash flow in the market. But do you know that it also has the potential to increase your wealth accumulation? The concept of inflation is well-known.

The average inflation rate of any country is 6.2%. Now, it’s a part of some basic math that every year the value of money is declining by 6.2%. Which in the long term will cost you a huge amount. Even if you opt for your parents’ favourite Fixed Deposit (FD), you will get no more than 4-6% interest. This means your wealth is either declining or staying the same. How are you supposed to get rich in these circumstances?

But here’s a catch for you, A good Blue-chip (Blue-chip stocks are highly priced market stocks, which have emerged as a preferred investment option over recent years.) or Large Cap stocks (stocks with the market cap larger than $10 Billion is called Large Cap Stocks) can give you handsome returns which will help you to beat inflation and also accumulate wealth.

To be Concise –

There are many cases in which some stocks not only beat inflation but also give you the return that can blow your mind away. For e.g.: 

More than 30 Companies have given returns of more than 100% and even up to 510% in the year 2020. Can you believe that? That was also when the whole world was suffering from Covid-19. I am not saying that stocks will make you a millionaire or billionaire quickly. But with some thorough research, study and experience, you can find the stocks that will give you multifold returns and will help you to accumulate wealth.

For any developing nation or developed nation, its Economy basically indicates the health of the nation. Factors that contribute to the Economy of a Nation are – 

1) Business Investment

2) Taxes

3) Purchasing Power of Citizens

4) Demand and Supply

5) Exchange Rate

6) Government Policy and Regulations

7) Inflation

Many of the factors are directly or indirectly related to Business Investment and Expansion. Wherever there is good Business, there will be employment and opportunities for development. And whenever a business expands, it will further create opportunities and employment. And how can a company expand its business? Well, you guessed it Right! Boom “Stock Market”.

When a person invests in the stock market, more preferably Index, he/she is actually investing in the Economy of its nation. And that’s why every Citizen of the nation should participate in the stock market. That is if you play it safe and sound.

Sources:

1) https://www.moneyworks4me.com/investmentshastra/best-performing-stocks-in-india/

2) https://www.economicsdiscussion.net/gdp/6-main-factors-affecting-gdp/15344

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