Stock markets can influence economic growth in the developing economies in several ways.
By enabling savers to acquire equity which they can sell when they wish to have access to their
savings or change their portfolios, liquid stock markets enable investors to reduce risk (Levine,
1996). Stock markets also play an important role in allocating capital to the corporate sector
hrough the sale of shares. Particularly in countries faced with financial constraints, stock markets
enable firms to raise capital required for long-term investment which in turn promotes economic
growth. Liquid stock markets can in addition, promote economic growth by reducing transactions
costs (Bencivenga et al., 1996). By permitting investors to hold shares in a number of firms, stock
markets enable risk diversification. Risk diversification allows more profitable investments to be
undertaken contributing to economic growth.