Strong Economy And Its Effect On Financial Market

1025 words - 4 pages

Following the trend of economy, it is important to investors to understand that strong economy creates strong stock market. To elaborate further, as stock prices are increased by current and future expectations of earnings, thus without a strong economy it would be difficult for the companies to increase and sustain their earnings (Kong 2013). The economy development is usually calculated using the gross domestic product of a countries. On the other hand, a change is the stock price can also cause a major impact to the consumers and investors directly. Hence, a loss in confidence by investors can cause a downturn in consumer spending in the long term, which will also affect the economy’s output (Aysen 2011). The graph below shows the relationship of stock market price (KLCI) and the GDP of Malaysia in 2009. Thus, it can be concluded that the economy and the stock market has a positive relationship.
Graph 1. GDP against KLCI in 2009 (DAH IKHWAN weblog 2008)

For an organisation to rise fund, they usually tend to look at the stock market and capital market to do it so. This is two markets are usually seemed similar by the investors as they both contributes to the development of an economy. But there are significant difference between them. The capital market is a market that consist of stock market as well as the bond market. As a result, the capital market provides a long-standing finance using the debt capital and the equity capital. Capital markets divided into two sectors known as primary markets and secondary markets. The primary market is where securities are issued for the first time whereas the secondary market is where securities that have been already issued are traded among investors (Difference between.com 2011). The capital market also allocate the resources by organising the funds and redirecting them in a profitable investment. Along these lines, capital market assumes a crucial part in exchanging the financial funds from surplus regions to shortage regions, therefore increasing the benefit and prosperity of the nation (Sinha 2012). For instance, in the financial times, the Asian companies have been stated to loan out more in bond markets in the month of April than ever before as the pursuit for yield gets back into higher percentage (Noble 2014).
In the latest development of the capital market, the Securities Commissions of Malaysia, stated in the Capital Market Masterplan 2 2011, will attempt to evaluate whether the capability to forbid goods or transactions that are hindering to the steadiness of the market or its members is needed. Furthermore, The SC will likewise fortify its communication about the risk being taken. This is because low consciousness of risks around investors prompts unsuitable inducements to risk taking.

There are many industries that have flourish due to the capital market. The recent industries that gain from the capital market is the knowledge based economy. The capability of...

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