With the market turmoil of 2008 and 2009 in fairly recent memory, investors were feared to take risk in the stock markets, as instabilities of global stock market accordingly enhanced. Stock market is a key element prior to reflect the performance of economy. It is an important part of the economy of a country. The stock market plays a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. That is reason that the government, industry nd even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view. Through this assignment, with particularly focusing on the performance of Hong Kong stock market, I am going to discuss the roles of the stock market that affect the economy by elaborating the functions of primary market and secondary market, and analysis the Hong Kong stock market in relation to the economy with statistics method. Importance of Stock Market
The stock market is a necessary and essential aspect of commerce world-wide. Without a stock market, companies could not easily to raise the fund and capital, and investors could not quickly and easily trade shares through the stock market system, and the global economy would not be established into a maturity stage like now a day. The stock market and thus they play the most important role of supporting the growth of the industry and commerce in the country. That is the reason that a rising stock market is the sign of a developing industrial sector and a growing economy of the country.
Primary market Whenever a company wants to raise funds for further expansion or settling up a new business venture, they have to either take a loan from a financial organization or they have to issue shares through the stock market. In fact, the stock market is the primary source for any company to raise funds for business expansions. If a company wants to raise some capital for the business it can issue shares of the company that is basically part ownership of the company rather than issuing debt for enhancing the capital and liquidity because of the cost efficiency.
There are three main financial systems such as resources allocation, risk management and risk pricing to simultaneously and consistently perform in an economy under the philosophy of primary market. Resources allocation in the primary market Primary market can raise the fund for the company business plan in a short period. Economy can be affected according to any new IPO issued in the stock primary market. To issue shares for the investors to invest in the stocks, through the primary market of the stock exchange they can issue the shares and get the funds for business requirements.
There are certain rules and regulations for getting listed at a stock exchange and they need to fulfill some criteria to issue stocks and go public. The company has the business plan which is required to borrow fund for implementation, and the company has planned to apply their fund raised by the stock market after issuing the share through IPO. Fund should be allocated in different areas of the business plan, and it can also increase the liquidity and capital. Refer to the IPO issuance of Industrial and Commercial Bank of China(ICBC) in 2006, ICBC was one of the biggest bank in China.
After the IPO. ICBC was the world’s biggest ever IPO that makes it at the same becoming the biggest bank with the most capital in the world. These can significantly increase the confidence of the investors and reallocate the resources in investing into different market against their business plan. Risk pricing in the primary market Investors always assess and calculate the interest and return to every investment which they made. In the primary market of issuing stock listed on the stock exchange, rules and regulations are formed to dominate any new issuers.
International banks and Investment banks are always the underwriter of the IPO. It can also comfort the investors that the risk has been assessed by experience large institutions accurately, and then the price of the share is announced to the public objectively. Investors can have more information to compare the return and lose through the provided information in the primary market. In the view of the above, investors will be attracted to invest into the IPO against the recommended pricing. More funding invests into the market that can make a positive impact to the economy. Risk management in primary market
To issue IPO in the primary market, guaranteed investors should be confirmed to every IPO announced. This can help into managing the risk, as a minimum of fund can be ensured to the company which can control the risk exposure. The company may have liquidity problem in case of failure in raising the fund of IPO, therefore, the function of guaranteed investor and IPO underwriter can mitigate suck risk, and that can be a risk management to protect the interest of the company as well as the investors. It can reduce the uncertainties and managing the risks involved in investment market of economy.
Secondary Market The secondary function of the stock market is that the market plays the role of a common platform for the buyers and sellers of these stocks that are listed at the stock market. It is the secondary market of the stock exchange where retail investors and institutional investors buy and sell the stocks. In fact it is these stock market traders who raise the fund for the businesses by investing in the stocks. So the stock market is not only providing the much required funds for boosting the business, but also providing a common place for stock trading.
It is the stock market that makes it possible to sell the stocks at any point of time and get back the investment along with the profit. This makes the stocks much more liquid in nature and thereby attracting investors to invest in the stock market. Mobilize Savings in the secondary market When businesses or even individuals hold their money in form of shares, they can easily mobilize funds for investments. Securities traded in the secondary markets are not as liquid as cash therefore this limits the ease of accessing cash.
Accumulation of funds for long-term capital projects is therefore easy and possible. The secondary market provides a convenient platform for the trade of securities hence shares can be easily converted to cash for investment. Investment Opportunities in the secondary market As opposed to holding money in savings accounts, the secondary market provides investors with an opportunity to save and at the same time invest. Shareholders can earn and make profit in investing in the secondary market, as the share price always rises and falls subject to the news in public and the environment of economy.
In the secondary market, investment in shares does not require a large of fund, therefore, it provides a chance to invest and expand their portfolios. Stock market and economy (Statistical analysis) To support the analysis of stock market in related to the economy, I have done a t-test showing as below. Basically, as the stock market should reflect the economy in advance. I do the statistic in one year difference. Refer to the result, the difference is considered to not statistically significant. The stock market seem influencing the economy significantly.
We can see the stock market dropped in 2008 that make the decrease of GDP in 2009. Due to the financial crisis in 2008, the stock market was in panic. This is one of the factors to decrease the GDP. In Hong Kong economy, as there was a great support due to the significant growth of China’s economy. In relation to the increase of HKEx index since 2009, the stock market was in recovery that bloom the economy and the Hong Kong property market has accordingly benefited to grow in these years. GDP was also reflected slightly growth.
It can strongly evidence and prove that the performance of stock market obtains a strong relationship with the economy. Conclusions With the reference of the above, stock market is essential to the impact of economy. Companies could easily raise the fund thru the stock market by IPO in the primary market, in order to apply the fund in implementing the expansion business plan, and the investors could gain interest and profit in the secondary market in stock exchange that the capital fund of investors could be increased, in which both factors could have positive effect to the economy.
In my recommendation, Hong Kong Exchange and Clearing Limited (HKEX) could consider to extend the trading hours. It could stay closer to other stock markets like USNY, London and etc. This implementation could attract more investors and equity fund to invest into Hong Kong stock market, as the time difference to other stock markets is shorten. It could increase the trading volume in the stock market. If the stock market becomes prosperous that makes the Hang Seng index increase, as more funds invest into Hong Kong, the economy in Hong Kong can accordingly rise in an absolute way.