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STOCK MARKET AND ECONOMIC GROWTH

Seminar Paper

Submitted by

Sumedha Dubey

Department of Economics, NMIMS University Navi Mumbai

Prof. Ishfaq Khoja and Prof. Meenakshi

Assignment Due Date – 27/03/2023

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TABLE OF CONTENT

Description Page No.

Acknowledgement 4

Declaration 5

Abstract 6

Chapter 1 Introduction 7

1.1 Significance of Research 8

1.2 Background of Study 9

1.3 Major Development in the Industry 10

1.4 Reasons for growth in Industry 12

Chapter 2 Literature Review 14

2.1 Objective research 15

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ACKNOWLEDGEMENT

The successful completion of a project is like a golden feather for any cap. This project bears the

imprint of many people. I would like to express my gratitude to DR. ISHFAQ , NMIMS

UNIVERSITY, for providing us with state of the art infrastructure facilities and her recognized

leadership. My heart felt gratitude to DR. ISHFAQ, for being my mentor and guiding light

throughout the project.. My earnest thanks to NMIMS DIRECTOR , friends and all those who

helped us make this research a success. My overriding debt continues to my family and friends

who provided me with the time, support, inspiration and friendly environment needed to prepare

this report. We would also like to thank all the investors who gave their valuable time in filling the

responses and help us reach the conclusion of their approach .

THANKING YOU ALL FOR HELPING AND SUPPORTING

Sumedha Dubey

Place: NMIMS, Navi Mumbai

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Declaration

I hereby declare that the submitted seminar paper is our original work and no

part of it has been published any where else in the past. We take full

responsibility, that if in future, the paper is found invalid according to basic

rules, the last decision will be of authorities concerned. Any form of plagiarism

will lead to disqualification of the paper.

Sumedha Dubey
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ABSTRACT

Without a question, stock markets are a vital and necessary aspect of every country's economy.

However, the influence of stock markets on the country's economy may differ from the impact of

stock markets on the economies of other nations. This is due to the fact that the influence of stock

markets on the economy is determined by a variety of variables such as the structure of stock

exchanges, their link with other components of the financial system, the country's governance

system, and so on. All of these characteristics are unique to each country, therefore the influence

of stock markets on a country's economy is unique as well. Over the years, the Indian capital

market system has experienced considerable stocks a mental institutional reforms, resulting in

lower transaction costs and significant gains in liquidity efficiency, openness, and security All of

these developments have resulted in the economic development of the economy via stock markets.

Similarly, economic growth fueled by technology advances, product and service innovation, and

increased demand for stock market development are predicted to produce a strong demand for

stock market development. The first section briefly reviews the evolution of international stock

markets and developments in Indian stock markets to help us understand how stock markets have

emerged as the driving economic forces that they are today; and the second section presents a

number of studies that review the impact of financial development, stock market development and

its functions, and its potential impact on economic growth.

There may be no one-to-one correlation among the economic system of a country and

its inventory marketplace - more so now not in the identical time frame. At the minimal, there are
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Leads and lags . the stock market is often a senitement indicator which could effect (GDP) both

negatively or undoubtedly. In a bull marketplace – inventory expense are growing customers and

agencies have more wealth and self belief .

Stock markets may affect economic activity through the creation of liquidity. Many profitable

investments require a long-term commitment of capital, but investors are often reluctant to

relinquish control of their savings for long periods. Liquid equity markets make investment less

risky—and more attractive—because they allow savers to acquire an asset—equity—and to sell

it quickly and cheaply if they need access to their savings or want to alter their portfolios. At the

same time, companies enjoy permanent access to capital raised through equity issues. By

facilitating longer-term, more profitable investments, liquid markets improve the allocation of

capital and enhance prospects for long-term economic growth. Further, by making investment

less risky and more profitable, stock market liquidity can also lead to more investment. Put

succinctly, investors will come if they can leave.

Key questions examined included in this research are –

• How do stock markets impact economic growth of a nation?

• What is the nature of relationship between financial development and economic

development (does financial development happen in response to economic development or
does financial development drive economic development)?

• What are the mechanisms through which financial development might support economic
development?

• Whether there is a specific role for stock exchanges in economic development?

• What potential negative effects financial development might have on economic development,
and how to mitigate these?
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CHAPTER 1 INTRODUCTION

1.1 SIGNIFNICANCE OF RESEARCH

The stock market is witnessing heightened activities and is increasingly gaining importance .

Exchanges are now crossing national boundaries to extend their service areas this has led to cross

border integration. This study captures the trends, similarities and patterns in activities and

movements of investors that how investors choose one stock over other. Through this study we

hope to learn more about how a extragenous variable impact investors decision for potential

dependent variables . We wish to investigate how these variables rate of returns , dividend

,profitability , debts of company , inflation , govt. policy , price of stock influence these attributes

stock , risk tolerance , investment size and experience of investors . Our main aim is to analyse

the relationship between economic growth and stock market we wish to analyse the market pattern

that leads to growth of a country? , How financial instruments are impacted by stock market ?

Effect on consumption and Wealth.In a bull market, people turn out to

be extra confident and boom their investments. This drives normal consumption and has

a superb affect at the economic system. human beings additionally have a tendency to boom their

investments in marketplace connected merchandise that assist them get inflation-beating returns

with the long time.

But, a endure marketplace hurts intake and negatively impacts economic increase. As investors are

in a state of panic, they assume two times earlier than making an investment, which retards boom.
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effect on business environment agencies play a key function in monetary boom, and stock

performance additionally influences enterprise surroundings. when the inventory marketplace pla

ys well, companies could gasoline their increase and enhance price. However, when markets are

down, the self-belief of organizations also takes a beating. They're unwilling to spend, which

negatively impacts items and offerings and gross home product.

How bull market affect the economic growth?

When markets rally and stock marketplace indices cross up with the aid of at the least 20% from

the recent low, markets are stated to be in a bull run. In a bull market, stock charges pass up,

and buyers turn out to be positive. Here’s how a bull market influences the economic system.

extra monetary development as intake Rises . In a bull marketplace, traders’ self belief within

the economy rises. As they are greater positive approximate, they interact more investments

and expenses. This increases client spending and positively impacts the gross domestic product.

Notice that purchaser spending is a primary thing of GDP, and its rise augurs well for the financial

system as an entire. Investments Lifts the financial system As traders have a tremendous sentiment

in a bull run they pump extra cash into the economic system by way of making various investments.

This propels the financial system and makes it extra strong. Greater Capital for organization

corporations have a profound impact at the economy. Their increase aids economic boom. In a bull

run, firms can easily improve capital thru IPOs as investors’ self belief is excessive. They

could deploy the budget to strengthen their bottom strains, which in the long

run enhances revenues for the authorities. The financial system in the long run advantages.
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How bear marketplace impact economy?

While marketplace indices fall by using extra than 20%, markets are said to be in

Retards monetary improvement The financial system retards while markets are in

a endure phase. that is due to the fact that is the time while traders and individuals are worried, and

they don’t want to invest cash. This reduces intake and drags down the economic system. Also, in

a bear phase, human beings tend to invest in low-danger property that similarly drag down

the economy. In a undergo market, there is a fall inside the investment portfolio of buyers because

decreased spending and service .This has a poor impact on consumer spending

slows monetary increase. Notice that consumer spending is a critical issue of gross home product

and its slowdown at once impacts the economic system.

1.2 BACKGROUND OF THE STUDY

Stock market is an crucial a part of the economy of a country. The stock marketplace performs a

pivotal function within the growth of the industry and trade of the country that eventually impacts

the economic system of the country to a tremendous volume. That is purpose that the authorities,

industry and even the critical banks of the country preserve a near watch on the happenings of the

inventory market. The stock marketplace is crucial from both the industry’s factor of view as well

as the investor’s point of view. Under the theory of co-integration, stock market actions have a

tendency to trend collectively within the long-run despite the fact that experiencing quick-run

deviations from the common equilibrium route.

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1.3 MAJOR DEVELOPMENTS IN THE INDUSTRY

We all know what a stock is, it is the fraction of ownership of a company. The stock market is
booming area which can help people generate a small proportion of income from the money they
have invested thus allowing people to have money working for them. The major questions that
now arises which “Stock”. Stock at times can be very tempting to buy when we see a boom in
the trend but at the end it’s the people and market which can get the stock value down in a
fraction of second. Now for that matter “Indicators” have been introduced which simplifies
things such as Relative strength index, Bollinger bands, the moving averages, and so on, there
are hundreds of indicators which help in technical analysis but yet are insufficient for analyzing
stocks if an investors want to earn good amount of return, Here is where stocksamental analysis
comes into play where stocks are analyzed by analyzing the various financial statements of the
company and based on that taking decisions on stocks for e.g.; Profit and loss statement, balance
sheet, trading A/C, Cash flow statements, for example.

The question of whether there is a causal relationship between the development of the stock
market and economic growth has been a subject of extensive research and debate among scholars
and policymakers. Some studies suggest that a well-developed stock market can stimulate
economic growth by providing firms with access to external financing and by promoting
investment, innovation, and productivity. Others argue that economic growth can stimulate stock
market development by increasing demand for financial services and by creating opportunities
for firms to raise capital.

In the case of India, the relationship between stock market development and economic growth is
particularly relevant given the country's recent economic performance and the potential for the
Indian capital market to play a key role in sustaining economic growth in the future. Indian
policymakers have recognized the importance of a well-functioning capital market for economic
development and have taken steps to promote the growth and efficiency of the stock market.

However, it is important to note that the relationship between stock market development and
economic growth is complex and multifaceted, and there is no single policy solution that can
guarantee sustained economic growth. Rather, policymakers must carefully consider the broader
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economic and institutional context in which stock market development occurs and design
policies that promote a stable and efficient financial system.

Overall, the relationship between stock market development and economic growth is an
important area of research and policy discussion, and policymakers in India and other countries
should continue to explore ways to promote a dynamic and sustainable capital market that can
support long-term economic growth. The relationship between economic development and stock
market returns is a persistent financial problem. Some institutional investors are wondering
whether they can give developing countries a higher weight centered on gross domestic product
(GDP) instead of market capitalization, as they expect that big future returns will explain this
greater weight. Supply models have been established to describe and predict stock market returns
based on macroeconomic outcomes. However, several assessments have shown a negative
association between stock returns and economic development across countries. Although GDP
growth affects financial markets, investors don't explicitly link it with the stock or bond market
return. GDP is a lagging intermediary that shows what the economy has achieved before,
whereas investment is a planned activity based on what investors believe would be the way of
potential GDP growth and what this would mean for their particular portfolios. Financial backers
should monitor the highs and lows of the economy to make reasonable monetary speculation
decisions, although there is no assurance that the future will follow the same pattern as the past.
The trajectory of GDP has the reverse impact on bondholders. Effective GDP growth typically
means higher demand for corporate and household credit, and it also indicates an eventual
inflation. This typically leads to higher interest rates, lowering bond yields. In comparison,
declining GDP typically implies lower inflationary pressures as well as decreased financing
demand, which means lower interest rates and higher bond prices in general.
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1.4 REASONS FOR GROWTH IN INDUSTRY

There are many benefits to investing in shares. Seven large ones are : The ability to earn higher

returns The primary cause the general public spend money on stocks is the ability go back as

compared to options together with bank certificate of deposit, gold, and Treasury bonds. for

instance, the average inventory marketplace go back has been approximately 10% yearly seeing

that 1926; long-term authorities bonds have again 5% to six% yearly in the course of the identical

period.The capability to shield your wealth from inflation inventory marketplace's returns

regularly appreciably outpace the price of inflation. for instance, the lengthy-time period

Submission Date: Sep 08, 2021/10% Similarity allowed Page 7 inflation fee has run about 3.1%

yearly given that 1913. That compares to a double-digit annual go back from shares. stocks were

a great manner to hedge against inflation. The ability to earn regular passive earnings Many groups

pay dividends, or a element of their income, to traders. the majority make quarterly dividend

payments, despite the fact that some corporations pay monthly dividends. Dividend income can

assist supplement an investor's paycheck or retirement profits. The delight of ownership A

proportion of inventory represents fractional possession of a business enterprise. you can personal

a tiny slice of a employer whose products or services you love.Liquidity most stocks trade publicly

on a prime stock change, making it smooth to buy and sell them. It also makes shares a more liquid

investment as compared to different options which include include real property investments that

you can't speedy sell. Diversification you can without problems build a varied portfolio throughout

many distinct industries through shares. That permit you to diversify your overall investment

portfolio, that may also consist of real estate, bonds, and cryptocurrency, reducing your overall
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threat profile at the same time as improving returns. The capability to start small way to $zero

commissions and the capacity to buy fractional shares with many online agents, investors can begin

buying shares with less than $100 .In summary , the relationship between stock price and economic

activity is complex and multifaceted . While there is no conclusive evidence on the predictive

power of stock prices for economic growth , analyzing the fundamental components of stock

prices for economic growth , analyzing the fundamental components of stock prices, examining

sector – level data , and correlating stock prices with industrial production can provide valuable

insights into the potential linkage between stock price the real economy.
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CHAPTER 2 Literature Review

There are several research papers accessible in the field of stock market and economic growth ,
both in India and abroad. We gain an understanding of the important research studies by doing a
literature evaluation of these articles. This research study was undertaken in four areas linked to
the current stock investment condition. The purpose of the study was to look at the selection
factors, perceptions, and professional capability of finance experts in this business. We have
selected studies linked to the traits examined for selection in the first area; work done on
assessing individuals' perceptions in the second section; and research studies connected to
Investors' performance evaluation The fourth part is concerned with research about statistical
approaches that may be utilised to investigate the aforementioned domains. According to the
academic literature, many statistical methods and methodologies have been utilised to evaluate
the selection criteria of persons for stock investment and its link with the traits that influence
their behaviour. We utilised conjoint analysis to determine the relative relevance of the variables
considered by Indian investors while picking Indian Stocks. According to the study's results, the
most relevant criteria for them are stock type, risk tolerance, investment type, market, and
investor experience. As a result, we concluded that there are other factors that influence stock
selection, but these five criteria, in general, influence how stocks are bought and sold. The
debate on whether financial markets promote economic growth is a complex and ongoing topic.
While some researchers argue that financial markets can mobilize savings and allocate funds
more efficiently, induce economic growth, and promote long-run impacts on economic growth,
others argue that financial markets can lead to instability and volatility that can harm economic
growth. Empirical studies have been carried out to investigate the relationship between financial
markets and economic growth, and the findings have been mixed.

Some researchers, such as Demirguc-Kunt, Levine and Zervos, and Atje and Jovanic, have found
that stock markets promote economic growth, while others have found that the relationship
between financial markets and economic growth is more nuanced. For example, Filer, Hanousek,
and Campos found a significant causal relationship going from stock market development to
economic growth, particularly for less developed countries. Chen and Wong found that the rate
of stock returns is a leading indicator of output growth in the case of four East Asian countries.
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Overall, the relationship between financial markets and economic growth is complex and
depends on a variety of factors, including the stage of development of the country, the quality of
the financial sector, and the regulatory environment. While financial markets can promote
economic growth, they can also lead to instability and volatility that can harm economic growth.
Therefore, policymakers need to carefully balance the benefits and risks of financial market
development when formulating economic policies.

Through the years more and more curious economists and researchers started to question the
reliability of the stock markets in indicating a country’s economic growth. Lucas(1988)stated in
his research work that the significance of financial activity in relation to the economic growth is
exceedingly aggravated. Chandavarkar(1992) states that he had not come across any
development economics pioneers who even considers finance in the list of factors effecting
development. This shows that some economists consider finance a slave to the enterprise as they
respond to the market demand of the distinct type of financial service initiated by economic
development. This idea was additionally upheld by crafted by various different analysts whose
reviews set up a connection between share costs and financial development alongside other large
scale monetary factors and have set-up that development in stock costs generally feature
financial exercises(Cheung & Ng, 1998; Ferson & Harvey, 1993).
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2.1 OBJECTIVE OF RESEARCH

Objective of the research is to examine who this relationship is established between stock
market and growth of a economy .

• How do stock markets impact economic growth of a nation?

• What is the nature of relationship between financial development and economic

development (does financial development happen in response to economic development or
does financial development drive economic development)?

• What are the mechanisms through which financial development might support economic
development?

• Whether there is a specific role for stock exchanges in economic development?

• What potential negative effects financial development might have on economic development,
and how to mitigate these?
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