Effect of Stock Market on U.S. Economy

THE STOCK MARKET AS A BUSINESS ACTIVITY

As a business activity, the various stock markets in the United States, together with their member firms, (1) provide employment to a substantial number of individuals in the United States, and (2) are consumers of goods and services produced by nonfinancial institutions. In this context, the stock market may be viewed only in positive terms, although there are limitations to the overall positive impact of the business activity of the stock market. The two limitations of greatest significance on the positive impact of the stock market as a business activity are (1) the relation of this business activity to the overall economy, and (2) to concentration of the impact of the stock market as a business activity. First, the overall level of output of the stock market as a business activity is relatively insignificant when compared to other industries in the

1 2American economy. Second, although stock broker members of the various stock exchanges operate branch offices in most urban areas in the United States, the major benefits of the stock market as a business activity are local

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equity stock for purposes of capital generation falls into the classification of longterm financial market activity. The issuance of new equity stocks accounted for only 17.0 percent (tenyear mean) of the longterm capital raised in the financial markets (Mackenzie, 1987). Bonds and longterm notes (39.3 percent) and commercial mortgages (31.5 percent) generated significantly more capital than did the issuance of new equity stocks (Mackenzie, 1987). Studies indicate that American nonfinancial corporations relied on the issuance of new equity stock for only 3.9 percent (tenyear mean) of their total capital investment requirements during the mid1970s to 5the mid1980s time period. Thus, the new equity stock contribution to total capital investment requirements was quite modest. From the mid1970s through the mid1980s, corporations began to rely more heavily on externally generated capital. In 1975, as an example, internal sources provided approximately 70 percent of the total capital raised by American corporations, while, by 1982, this proportion had declined to approximately 57.5 percent (Mackenzie, 1987). Financial leverage is the ratio of (1) fixedinterest debt to (2) shareholders' equity plus (3) fixedinteres
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Approximate Word count = 2146
Approximate Pages = 9 (250 words per page)

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