The Importance of Stock Markets

Han Tan
Updated: Jul 27, 2020, 08:22 UTC

What is the most well-known gauge for measuring how the economy of a country is performing? The strength of its currency gives us a picture but may be influenced by speculators and liquidity, while bond markets are normally considered a little complex for the general public to understand to any professional level.

The Importance of Stock Markets

The majority of people turn to the performance of a country’s stock market as the best indicator of how well that economy is doing. Stock markets cover all industries across all sectors of the economy. This means they serve as a barometer of what cycle the economy is in and the hopes and fears of the population who generate growth and wealth.

Stock markets have existed for centuries and will no doubt go on being the main public, regulated marketplaces where people can buy and sell shares of different companies.

Of course, today’s markets are very different from share trading in the Dutch East India Company back in 1602, but stocks still remain the most popular investment choice thanks to their potential for returns and their opportunity to invest directly in individual companies.

Why are stock markets essential?

  • Stock markets enable companies to be traded publicly and raise capital. The transfer of capital and ownership is traded in a regulated, secure environment.
  • Stock markets promote investment. The raising of capital allows companies to grow their businesses, expand operations and create jobs in the economy. This investment is a key driver for economic trade, growth and prosperity.
  • For investors, stock markets provide a way to invest money in order to potentially earn a share of the company’s profits (knowing that the risk of losses exists too). Active investors and traders can easily buy and sell their securities due to the abundant liquidity in most major stock markets.

Why trade stocks?

There are numerous reasons why companies, banks, funds, investors and traders buy and sell company stocks:

  • Investment Gains

Stock ownership may help your money grow. Over the long-term, the benefits of investing in stocks typically far outweigh those of holding money in lower-return assets like cash.

  • Diversification

Trading a variety of stocks can help you spread your risk across different asset classes, economic sectors, and geographical locations. This will expand the potential for positive returns in your portfolio.

  • Income

Some stocks provide income as regular dividends, even if the stock has lost value. That is income you can keep or reinvest. You can also register votes in company activities.

  • Control

Stocks trade by the millions every day so you can easily trade, buy and sell stocks and shares when you want. This flexibility also means you decide which company to invest in and when.

Trading stocks let you own a part of a company’s present and future. Depending on your risk tolerance and timeframe, the benefits can be many and varied.

Written by Han Tan, Market Analyst at FXTM

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Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

About the Author

Han Tancontributor

A highly experienced financial journalist and producer with more than seven years of experience gained across some of Southeast Asia’s (SEA) most prominent business broadcasters.

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