The Role Of Stock Markets Essay

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The Role of Stock Markets According to Alfaro, Chanda, Kalemli-Ozcan, & Sayek (2004) stock markets play a vital role as they allow investors to buy and sell shares in publicly traded companies. They are one of the most vital areas of a market economy as they provide companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company 's future performance. Stock markets generally reflect the economic conditions of an economy, Alfaro, Chanda, Kalemli-Ozcan, & Sayek (2004). If an economy is growing then output will be increasing and most firms should be experiencing increased profitability. This higher profit makes the company shares more attractive – because they can give bigger dividends to shareholders. If the economy is forecast to enter into a recession, then stock markets will generally fall. This is because a recession means lower profits, less dividends and even the prospect of firms going bankrupt, which would be bad news for shareholders. The Role of Over-the-counter Markets According to Duffie, Gârleanu, & Pedersen (2005) over-the-counter (OTC) markets serve as a type of secondary market also referred to as a dealer market (The secondary market is where investors purchase securities or assets from other investors, rather than from issuing companies themselves). This generally means that the stock are traded either on the over-the-counter bulletin board (OTCBB) or the pink sheets .The
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