The stock market performs 3 important functions in terms of wealth creation.

Firstly, it helps the buyers and sellers discover the market price, which is the best barometer of value in the context of equities.

Secondly, stock markets bring buyers / sellers / issuing companies / IPO investors all under one single platform. This helps each of these parties to discover the ideal price.

Thirdly, the market capitalization provides a barometer for measuring the wealth creation and destruction.

There are some very important ways in which the stock markets aid in value creation:

· It helps good quality companies get premium valuations in the market on the basis of consistent performance. When Infosys was listed in 1995, nobody believed that it would create so much wealth over a period of 20 years. Any investor who had invested Rs.10,000 in the IPO of Infosys in 1995 would be sitting on several crore worth of wealth today. This kind of wealth creation is only possible because of the stock markets.

· Stock markets give a platform for unknown but quality companies. Take the case of Eicher Motors back in 2009. The stock was quoting at Rs.200 back then. Over the next 6 years, the stock moved from Rs.200 to Rs.20000. That is a wealth creation of nearly 100 times. A person who had invested Rs.500,000 in the company in 2009 would be sitting on wealth of Rs.5 crore today. That kind of humongous wealth creation is only possible through stock markets.

· Stock markets also protect wealth by acting as a warning signal for badly performing stocks. You will normally see that the stock price of a company starts falling sharply much before the problems at a company surface. Take the case of Satyam which literally went bankrupt in 2009. But the market had started giving indications long before the company admitted to all the wrongdoings. The market gives an important lead indicator of stocks that are in trouble. This is Godsend for investors as they can interpret the same as a signal from the markets and can exit these stocks accordingly.

· Stock markets create wealth, not only by helping discover future stars but also by sounding out the investors regarding which companies are in trouble. Take the case of the Nifty. Had you invested Rs.100 in the Nifty in 1995, it would be worth Rs.8000 today. That is an 80 times appreciation with little market risk. That is what wealth creation in equity markets is all about.