To many people in the UK the stock market is nothing more than a rich persons play ground, the place where the city wheelers and dealers make their money, cut each other up and basically leave the rest of us behind, but is this the real story?

Behind that very public face of big bonuses, crazy dealing and a hectic 24/7 lifestyle, the stock market is the most vital component of any economy, the life blood of new business and a massive borrowing facility for the government, to mention just a few areas of importance.  The very public face portrayed in the mass media is something of a sham, and can often hide the real reasons for having a stock market, and the importance to our every day life.

Let us look at the main areas of the stock market and explain exactly how it works :-

Government Funding

Unknown to many, there is an area of the stock market dedicated wholly to the government, offering a way for the authorities to borrow money from investors, in the form of Government Securities.  These investments are as safe as any in the world, because if the country was to go under then we would all be in big trouble.

The government (via the Treasury) borrow billions of pounds a year, in the form over GILTS, which are basically a loan between the authorities and investors, agreeing to pay an interest rate in exchange for the “loan”, and stating a specific repayment date when the capital will be returned.  Even though the authorities receive billions of pounds a year in tax and other payments, very often the timing of these may not coincide with the requirement for immediate funds, so effectively the Treasury are borrowing the funds early, using the future income stream to repay the debt.

New Capital

This is perhaps the public’s main perception of how a stock market should work, raising capital for both new and old businesses perhaps looking to expand, invest in new products, etc.  These stock market offerings normally take the form of shares, although there are also a number debt instruments which companies may use to raise funds.

The share market is the one which hits the headlines, e.g. “Black Monday” when the market fell, or the “Crash” which saw the emergence of a worldwide recession.  These make the headlines, but behind the scenes the stock market has a really important role to play.

Investment

The stock market is basically an arena which allows investors to buy and sell shares in a particular company, whether these are traders (looking to make a quick buck for themselves) or long term investors such as pension funds. 

Pension funds and insurance companies make up the vast majority of the UK stock market investors (and many other markets around the world).  They offer the opportunity for your pension fund to grow through long term investment in the UK economy via a large group of shares, covering all areas of industry.

Conclusion

While many of us may not be aware of it, the stock market actually touches all of our lives every single day of the year.  The importance of the stock market cannot be under estimated, and the vital role which it has to play in both government, business and the lives of investors.