Introduction to Capital Market Development Free

Introduction- Defining the Capital Market

This course is made possible through the generous financial support of the Arab Gulf Program for Development (AGFUND). _For more information visit the Global Platform on Financial Inclusion _

Capital Market Development Nearly every country in the world has turned its attention in recent years to Capital Market Development.

Capitalist principles and free market economic theory have become favored tools, even in countries with a long history of socialism and nationalized industries.

Markets

A market can be located at a physical location, such as a stock exchange.

A market can exist without a physical location, such as an exchange that is run entirely over the internet, such as NASDAQ in the United States and most over-the-counter markets.

Market Forces and Market Products

Although we refer generally to the Capital Market, we must understand that the Capital Market consists of numerous segments.

Much of that activity occurs on formal stock exchanges, but much of it occurs through over-the-counter transactions and through private investment agreements.

A common misconception among many people is that a capital market principally is located within a stock exchange. As we will see, that is not true.

There is an enormous amount of capital market activity that takes place outside the confines of a stock exchange.

A stock exchange is an important component of a capital market, but it is only one component, and deals with only a limited aspect of the entire capital market.

Market Products: Financial Instruments

Not all stocks are equal, just as not all refrigerators are equal. Buyer interest will depend on differences in quality and pricing.

Primary and Secondary Markets and Regulation

Primary Market This is the offering of securities by the company to the public.

It could be an** initial public offering**, called an IPO, or an offering of additional securities by a company that already has listed securities.

In either case, the primary market refers to the first issuance of securities to the buyers from the company.

** Secondary Market:** After the issuer has sold securities to the public, anyone interested in purchasing shares will buy them through the secondary market.

The most visible secondary market is the stock exchange. The over-the-counter market is also a secondary market.

A company sells its shares to the public through **underwriters **and other agents. Once those shares are sold, any subsequent trading in those shares takes place on the exchange.

Of course, all companies want to see their share price go up, as that indicates public confidence in its future.

Rising share prices also facilitate the giving of stock options and stock bonuses to employees and the ability to sell shares in the future to raise more capital.

In some countries, such as Vietnam, the process was called equitization.

Participants in a Capital Market

An efficient capital market provides opportunities for companies and investors to be brought together to match their respective interests.

One would think that with so many different types of potential buyers and sellers there would be a lively capital market. That is not the case in many countries.

Determining Capital Market Success

Let us assume that Country A and Country B have identical laws and regulations. Why is the capital market more successful in Country A?

Three factors stand out as critically important: Public Confidence Efficiency Corporate Governance

There may be other factors affecting the relative performance of capital markets in different countries. Economic policies, political stability, and regional concerns all play a role.

Government’s Interest and Role in Capital Market Development

Analysis of differing economic models in recent years indicates the importance of Capital Market Development to the domestic economy.

This is in contrast to the loss or stagnation of economies that rely principally on government ownership of the means of production and distribution of goods and services.

To understand how the market operates requires considerable study and expertise.

It also requires being alert to the appropriate role of government; both as to what government can do and what government should refrain from doing.

Free Market Principles

Impact upon business enterprises Individuals who have the freedom to own their own businesses and enjoy the full benefit of business profits are more highly motivated to make those businesses succeed than individuals who have no investment stake or interest in profits.

Governments are under pressure to privatize in order to raise revenue, eliminate costly business operations, boost public investment opportunities, and increase productivity of goods and services.

These resources are best utilized by the private market through well planned and supervised capital market development.

Government's Role in the Free Market

Government’s role in developing a free market economy can be described as one of facilitation.

If government does its job well, the free market will develop and take its natural course.

This is what the famous economist Adam Smith meant when he referred to the “invisible hand” that leads to greater efficiencies and utilization of resources and labor.

As a result, companies will avoid reaching out to the public and bringing them in as investors in their enterprises.

There needs to be a balancing of interests. Companies cannot be permitted to engage in fraudulent securities offerings, but at the same time the standards must be realistic for local conditions and not unduly burdensome.

Government’s Role in the Capital Market

Training and Education on the Capital Market The task of acquiring the broad range of knowledge about the capital market appears daunting. Much of it is quite technical.

Knowledge and the ability to analyze what is important for the domestic economy have to be in place.

Regulation of the Capital Market

The Central Bank plays a key role in regulating interest rates, the public float of currency, and overall monetary policy.

Capital Market Supervising Agency The Capital Market Supervising Agency is a principal government institution affecting the capital market.

Most countries have established such an agency, whether called the Securities Exchange Commission, Securities Commission, Capital Market Authority, or any other title.

The securities statute creating the agency will often prescribe the principal agency commissioners.

Summary, Key Points and Glossary of Terms

The histories of capital markets differ from country to country. However, all capital markets share in common basic infrastructure, including statutes, regulations, and fundamental institutions.

To understand the capital market is to understand its purpose, how it differs from the monetary market, its participants, and the basic infrastructure that exists to put it all together.

The purpose of the infrastructure is to facilitate the trading of financial instruments, which is at the heart and soul of the capital market.

The capital market exists in order for enterprises to raise funds, for investors to place their funds into investment opportunities, and for investors to buy and sell their securities to others.

Full disclosure is the sine qua non of every capital market. Many of the laws and regulations exist for the purpose of assuring that that policy is met.

Both history and economic principles have proven that free market economies produce greater goods, services, and wealth than do government-controlled economies.

Many countries are in the process of moving away from government control of major businesses and industries, and this trend will undoubtedly lead to increased economic growth.

However, the free market cannot be entirely “free” from any government regulation. There are important protections that must be preserved for investors and to assure fair trade and competition.

Government’s role is to balance business and investor concerns to facilitate the growth of the free market.

All we can ask of government officials is that they educate themselves as well as possible and give their best effort to develop principles, policies, and programs that, in their best judgment, maximize business and investor opportunities.

Introduction to Capital Market Development: Quiz