The stock market plays a major function as an economic establishment which improves the efficiency in capital formation and allotment. It allows both corporations and the authorities to raise long term capital which enables them to finance new undertakings and develop other operations. We can happen that the public presentation of the economic system is enhanced when capital is supplied to productive economic units. Furthermore, as economic sciences remain to develop ; extra financess are hence needed to run into the rapid enlargement and the stock market hence helps as an appropriate tool in the mobilisation and allotment of nest eggs among viing utilizations which are critical to the growing and efficiency of the economic system. As a consequence, the stock exchange market acts as a barometer for economic public presentation in the sense that, it contributions to apportion the necessary capital needed for the consistent growing of an economic system.
Many surveies have found the positive relationship between stock markets and the long-term growing and development. For illustration, the survey by Levine and Zervos ( 1998 ) and Greenwood and Smith ( 1996 ) who found that stock market and long tally growing are positively correlated. Bencivenga, stated that stock liquidness has a really major function in economic growing by easing the job of long term control of capital and leting people to easy being able to easy neutralize their equity at anytime, while besides leting houses to raise their financess easy excessively. And it besides facilitates growing by promoting investors to get information on houses and better corporate administration. Furthermore, supplying people with a fiscal instrument, which is the stock market, which match their liquidness demands, encourages people to salvage more. Similarly, at any degree of a state ‘s development, both the authorities and the private sectors would inquire for long-run capital. For illustration, companies would necessitate to construct new mills, develop bing 1s, or purchase new machineries. Government would besides desire financess for the proviso of substructures. All these activities need long-run capital, which is provided by a well-functioning stock market. Therefore, by supplying a new manner for funding companies and cut downing the hazard of recognition after borrowing from Bankss, and by promoting economy, stock markets positively spur economic development.
Murphy ( 1990 ) said that by the manner proprietors try to work out the rule agent job by associating the directors ‘ compensation to stocks, proprietors are developing the stock market, and as a consequence they spur the economic growing. The surveies suggest that stock market contributes to economic development in a straight and indirectly manner. Directly by cut downing liquidness and indirectly by the market size which improves investings and as a consequence improves growing.
Strongly back uping the old surveies, Ologunde, Elumilade, and Asaolu ( 2006 ) besides mentioned that stock market is correlated to the economic system development. And it ‘s really of import for the investors, economic expert and policy shapers to cognize the adulthood and the degree of efficiency in the stock market because it ‘s used as a barometer of the economic development and wellness. As the measure of investing is increased, the economic growing is accelerated.
Obstfeld ( 1994 ) shows that international variegation stocks reduces hazard and improves growing. Another survey shows that variegation is one of the most of import maps of stock exchanges to economic growing by cut downing hazard. And this makes high- risk-high return for domestic and international undertakings worthwhile, and, hence, distribute nest eggs between investing chances more expeditiously that addition growing. One more facet in the same survey argues that Stock monetary values determined in exchanges and other publically available information aid investors make superior investing determinations. Good investing determinations by investors mean better division of financess among corporations and, as a consequence, the rate of economic growing additions.
Beside these findings that strongly back up the positive relationship between the stock market and the economic development, many critics argued the antonym. Many positions cast uncertainties on the part of stock markets to long-term growing. For illustration, Stiglitz ( 1985 ) said that because of the rapid changing in monetary values of stock markets ; it discourages investors to seek and hence creats a free-rider job. Furthermore, the part of liquidness itself to long-run growing has been questioned by Demirguc-Kunt and Levine ( 1996 ) who argued that liquidness may discourage growing via three channels. First, since liquidness ease the dealing of selling portions, it reduces the committedness with houses and discourages investors to look and seek for more profitable assets and hence growing will be decreased. Second, combing the effects of the decreased uncertainness of investings and liquidness might diminish salvaging rates. Third, permutation effects might cut down nest eggs. As a consequence, these effects create corporate administration job and destruct economic growing.
So, here we will analyze the relationship between the stock market and the economic development by analyzing the Saudi stock market.
Above graph shows market capitalisation in Middle East states on twelvemonth 2012. Harmonizing to WDI Saudi Arabia & A ; acirc ; ˆ™s market capitalisation is highest among it. Market capitalisation is a placeholder to stock market in this survey.
The Gross Domestic Product ( GDP ) in Saudi Arabia expanded 5.51 per centum in the 2nd one-fourth of 2012 over the old one-fourth. GDP Growth Rate in Saudi Arabia is reported by the Saudi Arabian Monetary Agency. Domestic Product ( GDP ) growing rate provides an aggregative step of alterations in value of the goods and services produced by an economic system. Saudi Arabia has an oil-based economic system with strong authorities controls over major economic activities. It possesses more than 20 % of the universe ‘s proved crude oil militias, ranks as the largest exporter of crude oil, and plays a prima function in OPEC. The crude oil sector histories for approximately 80 % of budget grosss, 45 % of GDP, and 90 % of export net incomes. This page includes a chart with historical informations for Saudi Arabia GDP Growth Rate.
Stockss in Saudi Arabia had a negative public presentation during the last month. Saudi Arabia Stock Market ( TASI ) , declined 329 points or 4.84 per centum during the last 30 yearss. Historically, from 1994 until 2012, Saudi Arabia Stock Market ( TASI ) averaged 4774.0 Index points making an all-time high of 20634.9 Index points in February of 2006 and a record depression of 1140.6 Index points in May of 1995. The Tadawul All Share Index ( TASI ) is a major stock market index which tracks the public presentation of all companies listed on the Saudi Stock Exchange. The index has a basal value of 1000 as of 1985 and it was reorganized on June 30, 2008. This page includes a chart with historical informations for Saudi Arabia Stock Market ( TASI ) .
Stock market performs an of import function in the economic development procedure, and it is one of the indexs in fiscal market. The importance of this type around the universe has opened a new way of research into the relationship between stock market and economic growing. The measuring of stock market development is of import because it is the principle for foretelling economic growing. After reexamining many surveies which analyze the connexion between stock market and economic, we now test the findings based on a model of Saudi Arabia.
So here we ask: What is the impact of the stock market on the economic system of KSA?
And our chief aim is to find the way of the relationship between the stock market and the growing of Saudi Arabia ‘s economic system.
This survey provides cognition to investors who are sing puting in Saudi Arabia, by allowing investors hedge some hazard after cognizing the relationship between the market and the economic development. This survey besides can give some utile information to investing practicians and policy shapers. This survey will be a part to the literature on the subject of stock market and economic growing.