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Also, most governments make a big effort to support stock-market development. There must be some economic rationale behind such policies.

A stock exchange is known as a means for investors to liquidate their stocks by selling to other investors. In finance, this function is called the "secondary market". It is always argued that the Stock Exchange of Thailand (SET) is an important source of capital raised for businesses in the real sector. In fact, a corporation can finance itself through several channels.

Debt and equity financing are two of the options. Debt financing can be in the form of a bank loan or debt securities, while equity security is issued to obtain long-term funds.

But regardless of which type of securities are issued - debt or equity - firms obtain proceeds from investors in the "primary market". The crucial point is that firms finance themselves from securities issued in the primary market, not the secondary market. Thus, the argument that the SET is a source of capital may not be completely accurate.

So if a stock exchange is not a vehicle for fund-raising, then it must not be very useful for a country's economic development, right? Actually, that is not true. Even though it performs only the role of a secondary market, to comfort investors regarding liquidity-risk reduction, it contributes much to the real sector.

I can explain it this way: imagine you are an investor who is deciding whether to invest in a newly issued stock in the primary market. Before you decide to buy the stock, you must analyse the investment. To subscribe to that stock, you will hold a certificate of equity - although in reality, that is not true, because it is a scrip-free system today. The certificate of equity (the equity scrip) shows your ownership in the invested company and has a certain value.

Suppose you have obligations prior to your stock-investment decision that you plan to settle. You may want to do so by using that certificate of equity, but it may not be possible to do so. The only way to relieve your obligations is to liquidate the certificate. You can imagine that without a good secondary market, it would be very difficult to liquidate your assets in time with fair value. If you really want to liquidate the certificate, you may have to agree to a large discount, because there is no or little liquidity for the paper.

This situation, in finance, is called "liquidity risk". In cases where there is no secondary market, or there is a weak one, it is obvious the investor will discount the value of the investment to compensate for the liquidity risk. The discount in value in the primary market affects the issuing firm in terms of higher cost of capital. If a firm experiences higher capital costs, it reduces its competitiveness. With higher capital costs, firms undertake fewer investment projects, because it becomes unfeasible to do so; with less private investment, economic development is affected.

We all know the composition of gross domestic product (GDP): household consumption, private investment, government expenditures and net exports. To promote sustainable GDP growth, one of the best ways is to promote private investment. By having a good secondary market, the stock exchange serves to help investors in the primary market reduce liquidity risk, which eventually reduces a firm's capital costs. That will boost the competitiveness of the real sector in terms of increasing investment opportunities and strengthening the economy.

In conclusion, I will restate that for a country to have a good stock market does not entail simply providing a platform for speculation to investors. It actually supports economic growth, because it contributes to the competitiveness of the national real sector by reducing firms' capital costs.