The stock market is one of the most important sources for
companies to raise
money. This allows businesses
to go public, or raise additional capital for expansion. The
liquidity that an exchange
provides affords investors the ability to quickly and easily
sell securities. This is an attractive feature of investing in
stocks, compared to other less liquid investments such as
real estate.
History has
shown that the price of
shares and other assets is an
important part of the dynamics of economic activity, and can
influence or be an indicator of social mood. Rising share
prices, for instance, tend to be associated with increased
business investment and vice versa. Share prices also affect the
wealth of households and their consumption. Therefore,
central banks tend to keep an
eye on the control and behavior of the stock market and, in
general, on the smooth operation of
financial system functions.
Financial stability is the
raison d'être of central banks.
Exchanges also act as the clearinghouse for each transaction,
meaning that they collect and deliver the shares, and guarantee
payment to the seller of a security. This eliminates the risk to
an individual buyer or seller that the
counterparty could default on
the transaction.
The smooth functioning of all these activities facilitates
economic growth in that lower
costs and enterprise risks promote the production of goods and
services as well as employment. In this way the financial system
contributes to increased prosperity.
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