ROLE OF STOCKS IN THE ECONOMY

This article aims to introduce and analyze stocks' role in the economy; it is primarily focused on the conceptual understanding of stocks and its classification, which is later streamlined into its relationship with the economy.
Estimated Reading Time: 10 minutes

Introduction

The economic structure of a country has different angles for determining its development. A mixture of capitalism and socialism in the market is one of the beauties of an economy. Various contributors play a significant role in shaping the economic market. One such is “stocks”; stocks in the economy have been provided with a critical role to determine and profile the economic purpose and operation. Those functions contribute to the development of the country its affairs. Stocks are a fraction or a part of ownership possessed by a person or business entity in a corporation for security. It depicts the investments made in a corporation which is represented in the form of a share unit. 

The economy stocks are primarily branded as a sort of investment in the financial market for socio-economic development; it is a proven fact. It is often noted that stock exchange markets play a role in financial tycoons of business and investments in a country; they control most trade and commerce in the business environment and accelerate the socio-economic growth. The profound role of stocks and the stock exchange market in the economy has outpaced its performance in capital market repeatedly overages when analyzed through its historical traces. Its purposes and functions are multi-layered; they understand and work according to the needs of both the capital market and the consumer market.

Enhancements in stocks and the capital market were witnessed in the 18th and 19th centuries; stocks had a growing need in the capital market to boost business and economic developments. The business entities started trading with their company’s ownership in the form of shares and securities. Both the primary and secondary markets attracted investors for a capital hike for running businesses, which became a ritual by the end of 19th centuries. They attracted investors for increasing capital, directly connecting it with public companies regulated and enforced by the 19th century in a predetermined manner. Investors’ interest in corporate shares and securities expanded the trading and business, which also catalyzed Stock’s growth in the economy as the promoter demanded to finance. The investors demanded deposits and liquidities for their additional income source, which was granted by the stock market.

What are Stocks?

Merriam Webster defines Stock as “the proprietorship element in a corporation usually divided into shares and represented by transferable certificates.”

In general, Stock is a share of ownership possessed by the person or business entity with a designated share value measured through money or assets sold and purchased through the stock exchange market. It is a form of security representing the certified ownership for purchaser over the corporation, meaning the trade and business for the seller in a corporation. These stocks are maintained and regulated by the stock exchange market along with various intermediaries and beneficiaries for handling the market procedures; each Stock entered into the market place have its dynamic value, the value of each will be measured and rated through different methods general called as Financial ratios a tool to estimate the market value of the Stock.

Stock Tendency

The tendency of stocks in the capital market will be analyzed by the stock trends, the directional movement of stock values in the stock market. They are interpreted in two ways uptrend and downtrend, which form an insignificant guide for the traders during their investments. Uptrend refers to the movement of the price value of the stocks in market in upward direction, which increases the credibility and profitability of the company assets; downtrend refers to the downward movement of the price value of stocks.

These movements are accurately measured using the financial tools of analysis which aid the traders and investors participating in the stock market.  They act as a signal that was accurately measured using technical analysis by the traders and other beneficiaries; it displays the rise and fall of stock values of the corporation, reflecting upon the sale of stocks in the stock market. These stock trends are also determinant factors of a nation’s social and economic development, which channelize the investment strategies of the consumer market.

Classification of Stock

Stocks classification primarily relies upon factors such as share value, rights, ownership, payment of dividend, price trends in the capital market, growth and risk factors etc., and other such prescribed and contracted characteristics that the issuing corporations propose during its participation in the stock market. These classifications encourage investors to choose out of their own will analyzing the pros and cons of the stock market trends; it is an incontestable fact that a market product with diversity attracts more participants; thus the stocks in the economy was classified accordingly.

·         Based on ownership 

It is related to the refinements and the rights provided to the stockholder which they can exercise during the period of holding the stocks such as voting rights, dissemination and receiving of shares and dividends during winding up, bonuses, inspecting accounts and audits, suing misconduct etc.,

Common Stock

These Stock provide the stockholder with less importance in refinements and rights and are always considered last in payment line for their shares during winding up. Common Stock ordinarily possesses voting rights that the stockholder exercise at the companies’ meetings and they receive payments for their designated dividends. 

Preferred Stock

Preferred Stock does not confer voting rights to the stockholder in meetings, but they possess very high claims upon the corporation’s profits and assets. These Stock have an assurance of fixed payments of dividends and is not affected by the price trends or the capital market trends. The stockholder received regular payments of their dividends and possess voting rights and first-hand preference in the settlement during the company’s winding up.

Hybrid Stock

Hybrid Stock is a combination of two different financial instruments which have both debt and equity characteristics, such stocks are issue by the corporations in a convertible format. They are imposed with a characteristic of convertibility from common Stock to preferred Stock and vis-à-vis. It provides the investors with fixed and floating returns at the time of dividend payment.

·         Based on dividend payment

A dividend is an amount paid by the company to its shareholders, equivalent to the number of stocks they possessed will fix its percentage when issuing the stocks in the market and the rate of which will be determined according to the company’s market performance and the stock trends. Higher the value of the Stock higher the dividend amount, lower the value lower the dividend amount. Depending upon these factors stocks are classified as follows;

Growth stock

Growth stocks are a kind of Stock which provide low dividend amount, the strategy used by the company in this kind of Stock is that; they reinvest the income received into the capital market itself to increase the value of their company shares in the stock market, by which the dividend amounts will have a hike shortly; this provides with faster growth of the stock value.

Income stock

Income stocks provide an ordinary income or dividend as assured to the stockholder. These stocks are usually issued by stable well-known companies which are not so volatile and does not show any surges in their price trends in the capital market

·         Based on value

The value determines the asset worth of the corporation referring to its intrinsic value which the corporation holds in their name; at the time of the public offering of stocks, the intermediaries work towards providing knowledge to the investors on the details of the net-worth of the corporation to ensure that their investments are to be repaid without setbacks at the time of dissolution or winding up. This intrinsic value is one of the prime factors in fixing the value of the stocks. 

Overvalued stocks

These stocks are issued with a share unit value that, when totalled, exceeds the corporation’s intrinsic value.

Undervalued

Undervalued stocks will have equivalent or comparatively less than the company assets’ intrinsic value, which is believed to have future possibilities of the price-value hike.

·         Based on the level of risk involved

The price trends of stocks in the stock market are dynamic. They fluctuate according to the market performance; these risk factors precisely classify the stocks introduced into the investor market.

Beta stocks

Beta stocks are stocks with very high volatility and have very unpredictable price trends in the stock market, the lesser-known companies or new-comers often issue these in the market field.

Blue Chip stocks

Blue-chip stocks are issued by such corporations which have a well-recognized name among the consumer and investor market. Though they face price fluctuations in the capital market, they are comparatively lesser risky that beta stocks.

Characteristics of Stock

  1. Capital for business: Stocks perform the fundamental purpose of raising capital for a business facilitated through public offerings; they form the investment for the corporation in developing and executing their business objectives
  2. Transferable unit of shares: Stocks are a transferable unit of shares which are issued to the stockholders with prescribed rights and duties in a certified format which is easily transferable to other person or business entity
  3. Certified ownership over company assets: Stock provide certified ownership over the assets and profits of the issuing corporation; it ensures a fractional proposition of the earnings from those intrinsic value part of the corporation when a stock is purchased for the issuers through the stock exchange market.
  4. Income generator: Buying of stocks from the stock market acts as an income generator for the stockholder; as the format prescribed, the corporation or the issuer of Stock indulge in profit sharing generated through the business. Apart from the intrinsic value associated with the Stock, the capital market also provides regular payments of the profits gained proportionately to the stock holding, which is called dividends.
  5. Infused with rights and liabilities: The stocks always carry its rights, liabilities and duties to be performed along with it, all such are transferable from person to person which are enjoyed with full motion.
  6. Economic developer: the undeniable characteristic factor of stocks is that they are the catalyst of economic development of a nation; the price trends, capitalization trends, market performances and price fluctuations are the ultimate product od stocks which determine the economic growth of the country. 

Importance of Stocks in Economy

Economic growth and development are dependent on various factors. One such is business, trade, and commerce; the business environment is multi-layered, and its tasks are manifold, though they contour the economy of a nation can visualize the in-depth understanding through its intricate concepts. One such complexity can be related to stocks and capital market; its role in the economy is convoluted yet pivotal. Some of the prime roles played by stocks in the economy are as follows;

Raising capital for business

Business enterprises cannot be operated without capital and investments; to handle the matters related to business the prime importance will be given to capital, thus raising capital is an essential requirement for companies and the same is influenced by the capital market or the stock market, where the public companies raise capital by issues stocks; i.e., part of the ownership of the company and business for the public offering. Business, wealth, stocks; all are inter-related, and all these together influence the economy.

Boosting investments and expenses

Investing in stocks have shown guaranteed returns through time immemorial, the acceptance and credence gain by stock market encourage consumers to support; these enhancements in investment strategies have a significant influence in increasing expenses which energizes the business enterprises by improving purchase and sale value which directly impact the economic enhancement of the country. 

Indicator of the country’s economic growth

As stated above, stocks being an indicator of country’s economic growth are an undeniable fact; the measure of Gross Domestic Product, which is considered a reflection of the country’s economic growth globally, is often influenced by the stocks and capital market fluctuation. The inflations and deflations of economy, price trends, and market performances are a product of capital market activities, and the same are the indicators of economic growth of the country.

Potential of maximizing the income for people at different levels

Stock investments are highly sought after strategy for income maximization for people at different economic levels, and its high returns policies attract more investments from the consumer market. These factors prove to have a very high potential of maximizing income for people which in turn enhance their economic standards

Promote business expansions and diversifications

An upsurge in the capital structure of a business reflects its development in different ways; the rise of the market’s stock value demonstrates business growth in expansions and diversifications. These aspects are promoted by the active participation of investors and corporations in stock market trading.

Boosting strategies for household financial planning

Even though the stock market is a financial institution on a large scale and is operated like oceans feeding giants, those markets’ influence can be witnessed even inside small households. It is irrefutable that an investment in stocks is a growing household financial planning strategy that is highly sought after. Various household financial planning models suggest stock market investments for income generation.

Enhancing exports and imports

When stock tendency shows an uptrend growth it directly reflects in the country’s currency value globally, such trend of the stocks that are being valued equivalently in the stock market outside the country can boost exports and imports value due to the currency rate fluctuations and differences.

Conclusion

When the global market is facing lots of challenges over the capital market stability, it is undeniable that over the past few decades, the world nations have shown great interest in stocks and securities market as their major capital builders. A consistent yet sustainable economic growth primarily contributed by the stock market, these contributory factors. 

Growth and development involved enhancements in trade, commerce, foreign direct investments, privatization and globalization within the capital market; all these enhancements are fed with stocks in the economy.

The regularised institutional factors also catalyzed the critical role of stocks in the economy; this ultimate effect of stocks and stock market performance makes it a vital factor for economic developments. Financial trading in the stock market contributes to social and corporate actions. It acts as a catalyst in the growth and expansion of businesses and the individuals’ personal economic development; functioning. The stock market trading through issuing and purchasing shares, securities, debentures and various other aspects of the capital market positively contribute to economic growth, and it is an irrefutable fact. 

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