Importance of Stock Market for Indian Economy

Posted by Prof. Dr. Dinesh Mahajan On 17/07/2023 09:51:25

Introduction: The stock market is concerned with the public market meant for issuing, purchasing, and selling stocks that trade over the counter or on a stock exchange. A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately. 

Stock markets have an impact on economic activity through the creation of liquidity. The liquid financial market was an important enabling factor behind most of the early innovations that characterised the early phases of the Industrial Revolution. Companies enjoy permanent access to capital raised through equity issues. By facilitating longer-term and more profitable investments, liquid markets improve the allocation of capital and enhance the prospects for long-term economic growth.

The BSE is the older stock market but the NSE is the largest stock market, in terms of volume in India. Both exchanges compete for the order flow that leads to reduced costs, market efficiency, and innovation. Now the BSE is measured as the world’s 11th-largest stock exchange, and the market capitalization is likely to be around $1.7 trillion. The market capitalization of the NSE is estimated to be over $1.65 trillion.

Importance of Stock Market for Indian Economy: The main points of importance of the stock market for the Indian economy are as follows-

  1. The stock exchanges help in finding fair prices of publicly listed securities.
  2. A well-functioning stock market is crucial to economic development because it helps businesses to easily acquire funds from the public.
  3. Stocks are considered liquid assets since they can be easily converted to cash and have a large number of purchasers at any given time.
  4. Stock exchanges help investors of certain bonds, such as sovereign gold bonds, to sell their holdings within the lock-in period or maturity.
  5. The industrialisation of a country depends on the availability of capital. This is made possible by the stock exchanges as the public can invest directly in the companies through stock exchanges.
  6. Investors in the stock market can directly benefit from a thriving economy, and the value of their investments rises in lockstep with economic expansion.
  7. A dividend is an additional income for investors, which is paid annually by most companies.
  8. By investing in stocks of a certain company the investor buys an ownership stake in the company.  It offers them a sense of belonging to the company.
  9. Stocks can be bought and sold easily with the help of technology. Nowadays there are various mobile applications for this purpose. One can easily buy or sell their stocks in a certain company. 
  10. Shares, bonds, mutual funds, and derivatives are among the financial products available in the stock market. This gives investors a wide range of things to choose from when it comes to investing their money.

Conclusion: The stock market plays an important role in the development of an economy. It helps in mobilising funds into the core sectors of the economy. Thus deficiency of capital in core sectors can be eliminated. Thus the benefits of planned investment accrue to the investors also in the stock market. Although there is a bit of risk that we often hear from people around us the benefits are more than that. India has a huge chunk of the population but their participation in the stock market is not as much as is required. For this, the government should encourage young investors by providing them with certain benefits like low rates of tax on capital gains, etc. This will help in creating a vibrant stock market and in return it will help the business community.

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