The Stock Market is one of the most important ways for companies to raise money, along with debt markets which are generally more imposing but do not trade publicly. This allows company shares to be traded publicly to raise additional financial capital for business expansion. The liquidity of shares affords investors the ability to quickly and easily buy and sell their shares. This is an attractive feature of investing in stocks, compared to other less liquid investments such as property and other immovable commodities. Some companies actively increase liquidity by trading in their own shares.
History has shown that the price of stocks and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development.
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 behaviour 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 that the counterparty could default on the transaction on individual buyers or sellers . The smooth functioning of all these activities facilitates economic growth in that lower costs and lower enterprise risks promote the production of goods and services as well as possible employment. In this way, the financial system is assumed to contribute to increased prosperity, although some controversy exists as to whether the optimal financial system is bank-based or market-based.
Recent events such as the Global Financial Crisis have prompted a heightened degree of scrutiny of the impact of the structure for stock markets (called market microstructure), in particular to the stability of the financial system and the transmission of systemic risk.