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How Do Stocks and Stock Investing Affect the US. Economy?


NYSE outside

Outside the New York Stock Exchange in Manhattan.

Photo: Spencer Platt/Getty Images Worried Stock Trader

A trader works on the floor of the New York Stock Exchange (NYSE) September 30, 2008 in New York City. The Dow rose 485.21 points after losing 777 points the day before.

Credit: Spencer Platt/Getty Images NYSE

Traders work on the floor of the New York Stock exchange on May 7, 2012 in New York City.Following weekend elections in both France and Greece that showed a growing frustration to German led austerity measures, global markets were shaken.

Photo: Spencer Platt/Getty Images

Question: How Do Stocks and Stock Investing Affect the US. Economy?

Answer: Stocks are how companies get funded to grow larger. Usually, when someone wants to start a business, they pay for it with loans or even their own credit cards. Once they grow the company enough, they can get bank loans, or even float their own bonds to individual investors. But, eventually they will need a lot of money to really take the business to the next phase.

This is when they will sell the first stocks, called taking the company public. The benefits of the Initial Public Offering (IPO) is that it raises a lot of cash quickly, and it signals that a company is successful enough to afford the IPO process. The only drawback is that the founders no longer owns the company because they have sold it to the stockholders. However,they can retain a controlling interest in the company if they own 51% of the shares.

Since the US stock market is so sophisticated, it is easier in this country than in many others to take a company public. This helps the economy grow, since it provides a boost up to companies wishing to grow very large. The stock market's sophistication means that information on companies is easy to obtain, and this increases the trust of investors from around the world. As a result, the US stock market attracts more investors, making it even easier for a US company to go public.

The stock market is also an economic indicator of how well the U.S. economy is doing. If investors are confident in the economy, they will buy stocks. Some experts believe it can often predict by about six months what the savviest investors think the economy will be doing. For that reason, the stock market usually rises in the expansion phase of the business cycle.

Stocks and Stock Investing FAQ


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