Securities Market and its Role in economic growth

A securities market is a place where the suppliers and users of capital meet to share one
anothers views, and where a balance is sought between diverse market participants. This is a
subset of financial market. It allows people to utilize their savings in a better manner as it
provides a linkage between the savings and the preferred investment across the entities by
channelizing them through securities into preferred enterprises. The securities market also
provides a market place for purchase and sale of securities and thereby ensures transferability of
securities, which is the basis for the joint stock enterprise system. It benefits both the enterprise
for capital and the investors for liquidity. The securities market enables a person to allocate his
savings among different enterprises as investments so as to diversify the risks among many
enterprises, which increases the likelihood of long term overall gains.

The securities market has two independent segments namely:
Primary market ( new issues) which provides the channel for the creation and sale of
new securities and and issued by public limited companies or by government agencies.

Secondary market (stock market) which deals with securities which are previously
issued and once issued in the primary market, it is traded in the stock market

Securities Market and Economic Growth

Savers and investors are not constrained by their individual capabilities, but enabled by the
economys capability to invest and save, which inevitably enhances savings and investments of
the economy. Thus the securities market converts a given stock of resources into a larger flow of
goods and services which augments the economic growth.

The securities market fosters economic growth to the extent it augments the quantities of real
savings and capital formation from a given level of national income and it raises productivity of
investment by improving allocation of investible funds. The extent depends on the quality of the
securities market. In order to improve the quality of the market, that is, to improve market
efficiency, enhance transparency, prevent unfair trade practices and bring the Indian market up to
international standards, a package of reforms consisting of measures to liberalize, regulate and
develop the securities market was implemented in 1990.

The securities market enlarges the financial sector, promoting additional and more sophisticated
financing; it increases opportunities for specialization, division of labour and reductions in costs
in financial activities. The securities market and its institutions help the user in many ways to
reduce the cost of capital. They provide a convenient market place to which investors and issuers
of securities go and thereby avoid the need to search a suitable counterpart. The market provides
standardized products and thereby cuts the information costs associated with individual
instruments.

There are also other developmental benefits associated with the existence of a securities market.
First, the securities market provides a fast-rate breeding ground for the skills and judgement
needed for entrepreneurship, risk bearing, portfolio selection and management. Second, an active
securities market serves as a tool for general financial development and in particular, accelerates
the integration of informal financial systems with the institutional financial sector. Securities
directly displace traditional assets such as gold and stocks of produce or, indirectly, may provide
portfolio assets for unit trusts, pension funds and similar financial institutions that raise savings
from the traditional sector. Third, the existence of securities market enhances the scope, and
provides institutional mechanisms, for the operation of monetary and financial policy.

Conclusion

A well-developed financial market and securities market lead to better decision making. This
results in efficient and effective allocation of resources. This leads to economic growth.
Economic growth creates demand for financial instruments, and, where enterprise leads, finance
follows.