You are here:

Economics/Stock market as part of money supply


Dear Michael,
Why isn't the stock market or the bond market part of the money supply (M0, M1, M2, or M3)? Or is the market capitalization of these markets already part of the broadest money supply?

Stocks and bonds themselves are not money but, rather, a representation of partial and temporary ownership in the company itself (in stocks), or in their future earnings (in bonds).  Companies gives stocks and bonds to investors in exchange for money, which is used by the company to expand operations.  That's why stock and bond markets are considered "capital markets" - companies utilize these markets to raise capital (money).  The money being spent to purchase these stocks and bonds is already part of the money supply, but is merely changing hands from investor to company.  Then the money changes hands again from company to supplier, as the company purchases non-cash assets.  

Whether the total value of the company's stock (it's capitalization) increases or decreases doesn't influence money supply at all because it doesn't actually change the amount of money available.  Stocks and bonds aren't money, regardless of their changes in value, but they can often be exchanged for money with other investors on the secondary market.  The money used in these transactions, though, is also already part of the money supply.

As overall prices increase, the amount of money doesn't change, but the speed with which individual dollars are exchanged (called monetary velocity) increases.

I hope that helps!


All Answers

Answers by Expert:

Ask Experts


Michael Taillard


Accepts most economic questions


Economic Consulting: American Red Cross; US Strategic Command -- Economics Lecturing: Bellevue University (Bellevue, NE) Huijia College (Beijing), OPII Schools (Omaha), Madonna University (Livonia), Schoolcraft College (Livonia), ZomBCon (Seattle), Zombiefest (Lincoln) -- Media Appearances: Dead Man Working (2012 Movie documentary), The Heartland News (Omaha local news outlet)

American Economics Association, Business Networks International, Midwest Writer's Guild, Zombie Research Society

Economics and Modern Warfare: The Invisible Fist of the Market (Palgrave Macmillan) -- 101 Things Everyone Should Know about Global Economics (Adams Media) -- Corporate Finance for Dummies (Wiley) -- Psychology and Modern Warfare (Palgrave Macmillan) -- Analytics and Modern Warfare (Palgrave Macmillan)

PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

Awards and Honors
Philanthropy awards and nominations for the OPII Schools economic experiment

©2017 All rights reserved.