Stock value is determined by the financial performance of the company, and it is the value of the stock that tends to trade at a lower price compared to its fundamentals such as dividends, sales, and earnings. An investor can evaluate their income through the expectation of future profit on stock purchased. When the stock value is low, the investor is likely to buy or hold the stock and sell them when the prices improve. Public perception may affect the value of stock at any given time. Negative perception will certainly lead to a low stock value that will, in turn, scare away the investors. The stock market is one of the accelerators of the economy. Some of the stock market driven economies in the world includes;
Hong Kong is one of the leading international financial centers in the world characterized by low taxation and is one of the most efficient international financial markets. Hong Kong Stock Exchange has a market capitalization of US $3.1trillion and the sixth largest stock exchange in the world. The value of stock traded in SEHK is 667.5% of the value of the country’s GDP. Products traded in SEHK include ordinary shares, real estate investment trust, unit trust, and exchange traded fund. The success in the stock market trading in Hong Kong is attributed to government intervention on the market operation and policies for low taxation that allows for business innovation. There are also minimum barriers to accessing market by foreign investors.
China’s market capitalization to GDP ratio was 361% as at 2015. China Stock Exchange consists of Shanghai SE, Mainland stock, and Shenzhen SE. The ratio of the cap to GDP started to improve in 2007 in China during an economic boom. China has a well-developed financial institution with a well-developed bond and equity market. China’s stock market has been directly related to the growth and expansion of the economy. The stock market in China is expected to perform even better as most economies around the world especially from Africa preferring to invest in China.
The US is the most developed economy in the world with most stock being traded in its stock exchange markets. After the economic recession of 2008, investor confidence has been significantly boosted by the well-performing companies with better stock values in the market. The active stock market in 2015 was 230.7% of the total GDP. The international financial institutions continue to contribute substantially to the stock trading in the US. The high trading volumes have been interpreted as a case of overvaluation of stock by the US stock exchange market.
Other countries with a higher cap-to-GDP ratio include Switzerland (143.7%), Japan (135.1%), South Korea (133.8%), Spain (81.6%), South Africa (74.8%), Canada (70.7%) and Thailand (68.6%). For most of the developed countries, market cap to GDP ratio is approximately close to 100% while in developing countries the ratio is close to 80%. If the ratio goes above100%, then the market is likely to be overvalued. Market cap to GDP ratio increases as more companies get listed on the stock market through the initial public offer.