One of the unexpected side effects of the pandemic is an unprecedented rise in the number of traders and investors. The U.S. stock market, the largest in the world, reached an incredible milestone in December of last year – over one trillion shares changed hands in the over-the-counter trading.
This is fabulous news for the industry, especially for brokerage houses that collect a commission for each order they execute. The increase in trading activity has other implications, too, most of them positive.
What Does the Stock Market Represent for an Economy?
The stock market is the place where companies list their shares and become public. It represents a way to obtain funds to expand the activity.
A company typically issues new common shares in an initial public offering. The public buys the shares, and thus the ownership of the company changes. Each share represents one piece of the company.
The U.S. stock market is the largest in the world. Every corporation in the world aims at one point to be listed on the U.S. stock exchanges and thus to have access to the U.S. capital.
An increase in the stock market trading implies a strong interest in the U.S. companies or companies listed on the American stock exchanges. So big is the difference in trading activity when compared to the previous months that it cannot come only from internal sources, from Americans. The only explanation is that foreign funds pour into America’s stock market, and in order to buy stocks one needs to pay for them in the local currency. As the dollar was cheap, and still is, it attracted foreign capital.
A high level of trading activity also implies that a new generation of traders and investors come to the market. Because of the pandemic, people spent more time online and consumed online products, stock market trading being one of them. The rising stock market also creates a wealth effect that translates into people becoming more confident about economic growth and future.
It is one thing to see the stock market prices making new highs but with few market participants and another thing to see the market rising with more interest from the market participants. It means that the markets are efficient, the companies have an easier time getting access to funds, and trust in the financial system builds up again.
The first step to economic recovery is a strong stock market. From this point of view, America leads by far.