Securities markets in general have many positive effects on the United States economy, provided that they function properly. Some of these effects can turn negative if the markets do not act in the way that investors hope and expect, and the resulting uncertainty can reduce economic growth. It is important to note that the securities markets include not just equities, but also bonds, derivatives and other forms of financial instruments.
Creation of Wealth
Securities enable investors to build wealth through investment and growth of that investment. Pension funds, institutions and individual investors alike each have the ability to deploy their assets in securities, with the hope that their assets increase over time. In fact, most retirement plans these days are predicated on growth of workers’ investments. Even the Social Security Trust Fund is a purchaser of securities, buying U.S. Government obligations to invest its proceeds, collecting the interest on these bonds to meet its obligations. The worst case scenario is that, in an attempt to create wealth through investment, assets actually depreciate, wiping out investors’ money and causing households to become poorer. Securities market proceeds have driven the torrid economic expansions of 1999 and 2017. At the same time, the securities markets are a leading economic indicator that portend rises or falls in the securities markets.
Funding New Comapanies
The securities markets provide capital for new businesses, enabling them to incubate and develop. Companies tap the securities markets relatively soon after their formation, selling ownership stakes to deep pocketed investors in private securities offerings. Then, as companies mature, they offer securities on public exchanges to further raise capital to finance operations. Over their lifetimes, companies can also raise money on the securities markets through sale of debt securities. The ability to offer securities helps companies obtain necessary operating capital, especially before they are profitable. It is likely that many new companies would not be able to be successful without the access to the securities markets. The securities markets had an outsize impact on the technology boom that began in the 1990s as the amount of companies that issued securities and received funding reached new levels.
Securities markets help drive assets in the direction of companies that are succeeding. At the same time, assets get shifted away from foundering companies. Additionally, the incentive to increase a company’s share price drives them towards making investments that help enhance productivity. Additionally, the ability to profit off of an increase in their company’s share price increases workers’ motivation to both produce and innovate.
Reduction of Risk
The securities markets help in the reduction of risk in the overall economy. For example, farmers are able to hedge their exposure to fluctuating crop prices by hedging with futures and covering their downside risk. Airlines who are at risk of rising fuel prices are able to hedge their risk in the futures markets by buying jet fuel futures. Securities markets also allow insurance companies to spread risk by purchasing derivatives to limit their risk exposure.
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