What is the connection between the stock market and economic growth?

The stock market reflects changes in a company’s performance and prospects.

Economic growth occurs when production levels increase in response to consumer demand. The stock market and economic growth are closely linked because the stock market rises and falls in tandem with the fortunes of the companies that drive economic expansion. While equity markets serve as useful barometers for anyone trying to measure growth, some economists even argue that equity markets stimulate growth.

Growth typically begins when companies respond to increased demand for goods and supplies by hiring new workers. To cover the cost of hiring new employees, companies rely on borrowed resources or equity investments from the company’s owners. Many companies borrow money in the form of long-term debt called bonds, and these instruments can be bought and sold on stock exchanges all over the world. In addition, shares or shares of companies are also bought and sold on the stock markets and companies raise money by selling lots of shares to investors. Using marketable bonds and stocks to raise capital means that there is a direct connection between a nation’s stock market and economic growth.

In the absence of equity markets, companies must rely on company owners who use their own savings to finance the company’s expansion or borrow funds from financial institutions. Banks finance loans by borrowing money at low interest rates from consumers and then lending that money at a higher rate to businesses and borrowers. Traditionally, banks act as intermediaries in transferring funds from savers to borrowers, such as expanding companies. Free market advocates argue that equity markets eliminate banks as intermediaries and that means funds can be more efficiently passed from savers to borrowers. Many economists believe that the relationship between the stock market and economic growth is one of mutual dependence, as easy access to funds allows companies to expand and this stimulates growth.

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Critics of free market economies also recognize the connection between the stock market and economic growth, but argue that equity markets can actually negatively impact growth in the long run. These individuals believe that investors are less likely to make investments in illiquid long-term products such as certificates of deposit (CDs) if they have constant access to highly liquid growth instruments such as stocks. Since banks use CD money and funds from similar types of products to finance mortgages and long-term loans, these banks need to reduce these loans when large numbers of investors divert their money into stocks and other bonds. In the view of some economists, this could make long-term sustainable growth more difficult to achieve.

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