The role of the Stock Market

The Stock Market is a place of exchange between the holders of capital and those who need it . It is a mistake to limit the stock market to a role of speculation, its primary function is the financing of the economy . It is an alternative to the bank loan which is more geared towards the short term.

The Stock Market is a market which offers guarantees of transparency, liquidity and security to investors. The notion of liquidity on the stock market is very important, it is what guarantees investors to be able to recover their savings at any time if they so choose.

For the system to work, capital seekers can pay remuneration to capital providers in the form of a dividend. Investors also have the prospect of making a profit if the stock price of the asset appreciates.

On the stock Market, we can distinguish the primary market and the secondary market . The primary market is the place where securities issues are made . An initial public offering takes place on the primary market. It’s sort of like the new home market. The secondary market is the place where the securities traded daily  stock . This is the second-hand market for listed financial assets. These assets generate more or less transaction volumes.

The stock market as a means of financing

For companies

: Companies use two tools to finance themselves through the stock market: stocks and bonds. Bonds are a riskier means of financing for the company, which alone bears the risk of the development of its investment projects. Conversely, actions allow the company to finance itself by sharing this risk with other investors (individuals, hedge funds, banks, etc.).

Without the stock market, companies could not finance their investment projects and continue to develop.

For States

: The financial role of the Stock Market is twofold. On the one hand, it allows direct financing with the issuance of government bonds. There are short, medium and long term issues according to the needs of the States. There are even 50-year bonds today.

The Stock Market also provides indirect financing to States for the taxation of income from stock markets. There is the capital gains tax on securities, the dividend tax and the financial transaction tax. This brings a significant financial windfall to the States.

The stock market as an assessment tool

Business valuation

: The market capitalization of a company is a method of valuing companies. It also makes it possible to judge the confidence of investors in the various securities. If the stock price of a company goes up, it is because investors have confidence and it will be able to finance itself more easily on the stock markets thereafter. Conversely, a company whose share price falls reflects a lack of investor confidence in the company’s ability to continue to develop.

The Stock Market is also used by very large companies as a tool for comparison with competitors. The bigger we are, the more scary we are. For medium-sized companies, the Stock Market is a way to finance themselves but also a way to make themselves known to the general public, to show their financial strength, and to show that we have ideas for development and that we see large.

State assessment

: As for companies, the stock market is a tool for assessing investor confidence through interest rates. If the interest rates of a country are high to finance itself, it is because investors do not have confidence in the future of the country, not confidence in its capacity to repay its debt. Investor confidence can also be measured with the subscription rate for government bond issues.

We can thus compare the interest rates of different countries and establish a ranking of the countries most popular with investors.

The stock market as a hedging tool

Companies use many derivative products on the stock market ( futures, options, futures contracts, etc.) to protect themselves against numerous risks:

Risk of change

: The evolution of the Market rate between two currencies on the stock can have serious consequences depending on whether the company is an importer or an exporter abroad. Companies will then use the stock market to hedge against this risk by using a currency swap.

Interest rate risk

: A change in rates has consequences on bank loans but also on bond rates. This can therefore impact the cost of financing the business with banks but also on the financial markets. The company will then use the stock market to hedge against this risk by using an interest rate swap.

Risk of price variations

: The price of raw materials is constantly changing on the stock markets. For a company to be able to ensure good management, it needs to stabilize its costs. With the use of futures contracts, the company will be able to fight against this risk.


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