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FINA 213.pdf

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The Role of the stock exchange in the Economy
.The major role is that it promotes a culture of thrift, or saving. The very fact that institutions
exist where savers can safely invest their money and in addition earn a return, is an incentive to
people to consume less and save more.
Secondly, it assists in the transfer of savings to investment in productive enterprises as an
alternative to keeping the savings idle.
Thirdly, it assists in the rational and efficient allocation of capital, which is a scarce resource.
Fourthly, Stock markets promote higher standards of accounting, resource management and
transparency in the management of business.
Fifthly, it improves the access to finance of different types of users by providing the flexibility
for customization.
Lastly, the stock exchange provides investors with an efficient mechanism to liquidate their
investments in securities.
There are many others less general benefits:
a) The mobilization of savings for investment in productive enterprises as an alternative to
putting savings in bank deposits, purchases of real estate and outright consumption.
b) The growth of related financial services sector e.g. insurance, pension and provident fund
schemes which nurture the spirit of savings.
c) The check against flight of capital which takes place because of local inflation and currency
d) Encouragement of the divorcement of the owners of capital from the managers of capital, a
very important process because owners may not necessarily have the expertise to manage capital
investment efficiently.
e)Encouragement of higher standards of accounting, resource management and public disclosure
which in turn affords greater efficiency in the process of capital growth.
f) Facilitation of equity financing as opposed to debt financing.
g) Improvement of access to finance for new and smaller companies.
h) Encouragement of public floatation of private companies which in turn allows greater growth
and increase of the supply of assets available for long term investment.