Financial Market Growth

Financial Market Growth deals with the evolution of the financial market over the passage of time and how it has grown as one of the key markets of any country in the world. The financial market performance is often considered as a barometer for the economy and with the current globalization and integration in the world financial markets, the effect from one part of the world gets rapidly translated into stock market changes in other parts of the globe. Based on this feature, financial market growth can also predict the future of financial market performance worldwide.

Financial Market consists of two sectors of the economy: namely the money and capital markets, with the stock markets assuming an ever increasing importance. The origin of the stock markets can be traced to the Industrial Revolution in Europe that brought the age of heavy industrialization, growth of private enterprise and the desire to start big businesses by individuals. This led to the creation of joint stock companies or partnership firms where many individuals pooled their resources together and each partner was represented by a unit of ownership in the company which later became “shares.†With the volume of companies increasing and more shares floated or sold to the public, an organized marketplace for the exchange of these shares evolved and the world’s first stock market, the London Stock Exchange was founded in 1773. Financial intermediaries such as the brokers, fund managers, investment banks and instruments such as bonds then followed as a natural consequence. The stock exchange now functions as a central institution in mobilizing domestic savings and allocating them to the most efficient sectors of the economy. Stock markets also serve the purpose of giving the companies a chance to raise capital for the expansion and development of the company and act as a key component in enhancing the flow of international capital. Investors on the stock exchanges can either rely on capital gains for dividends accrued from company shares. The marketability or liquidity of the shares is another important consideration for the investors to consider.

The key stock markets of the world are the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), the Tokyo Stock Exchange (TSE) and the Hong Kong Stock Exchange (HKSE). The two important stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Over the past ten years, the total value of stocks listed in all of the world’s stock markets increased from $ 4.7 trillion to $ 15.2 trillion while the share of the emerging markets in the total world capitalization increased from less than 4% to 13%.

In the developing world, stock markets have shown to give a fillip to the overall economic development of a country by increasing the liquidity in the economy. Although this sometimes effects in a spiraling inflation, but it promotes the savers to save more and acquire company shares and equities by making investments less risky and more attractive. The investors can realize capital gains or can sell cheap if they want to access their savings or alter their investment portfolio. The companies can also enjoy permanent access to capital through raised equity issues. One of the rising concerns in many of the Asian emerging economies of today is the issue of stock market bubbles on the face of soaring stock indices in these economies, which might in turn burst and a recession might creep in leading to the derailment of the process of development.

Financial market growth can also be directly associated with the growth in money markets of the world. Money has evolved from the days of the barter economy to facilitate ready exchange of goods and services and has developed into a general medium of exchange in the modern world. Banking has emerged as one of the central institutions in today’s world and banking services have become more diversified with the creation of mortgage banking and investment banking coexisting with the general mode of banking services. Financial market growth can also be traced to the growth of the insurance and derivatives markets which have gained tremendous importance in the recent years.

There have been many thoughts about the correlation between stock markets and the banking system and whether the latter really spurs economic growth. Although it is a general perception that countries with a well developed banking system tend to grow faster than those with a not-so-developed banking network, but more extensive studies regarding different groups of countries will show that each of the factors are independent agents of economic growth and tend to reinforce each other. Both banking and stock markets will enhance the savings of the economy and promote more investment.