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Why do you think the stock market plays an important role in the economy? - Greg Martone - 11-27-2012 06:34 AM
Discuss several (3 or more) significant points. Thanks!
- Bored Goblin - 11-27-2012 06:42 AM
it directs investment to most promising opportunities.
it lets people invest their savings
it transforms all available information about a firm into a single number indicating its health - the stock price.
- simplicitus - 11-27-2012 06:42 AM
1. Because people like to gamble
http://www.sptimes.com/2005/03/13/Business/Despite_history__stoc.shtml
2. Because there are very few other places where people can invest their retirement funds, etc.
http://en.wikipedia.org/wiki/Stock_market#Relation_of_the_stock_market_to_the_modern_financial_system
3. Because it allows the financial services companies to steal money while at the same increasing the fragility of the financial sector and the economy as a whole
http://www.nytimes.com/2009/07/24/business/24trading.html
http://rajivsethi.blogspot.com/2010/05/reflections-on-flash-crash.html
Anything that can crash the economy plays an important role.
When it comes to allocation of resources, the role of the stock market has declined dramatically:
A. Small business, those most in need of capital, are not served by the stock market at all.
B. Even larger new businesses often find funding outside the stock market.
http://mashable.com/2011/01/03/facebook-raises-500-million-now-worth-50-billion-report/
Globally, new stock issues totaled about $500 billion out of a total valuation of $37 trillion. That's less than 1.4%. Corporate borrowing is much higher than that.
http://www.federalreserve.gov/releases/z1/current/coded/coded.pdf
C. It is clear that the stock market is not anywhere close to the perfectly competitive market that people used to think it was. That means it is NOT efficient.
http://www.princeton.edu/~dixitak/home/StiglitzFest_Dixit.pdf
http://www.scribd.com/doc/12103054/Stiglitz-Invisible-Hand