Factors that Determine Stock Market of Corporations
Abstract
In this paper, I look into capital markets in general describing them as markets in which financial securities are traded. The capital market instruments differ from money markets in that they take longer to mature, a year or more, as opposed to money markets (Martin, 2013). They are also a source of income for the investors who earn when the stocks rise in values. I will also look into services offered by capital (krani, 2010).
Most importantly however will be a cross-sectional study on financial market trends in the stock markets and the capital market of corporate companies. Under this also will be a study on the main means of disposing stock exchanges and its importance to the governance of a corporate company. This involves what challenges these methods face and the result of the massive competition that has come up in the sector as well as how alternative trading platforms, which are on the rise, affect stock exchange and corporate governance (Trivedi, 2008).
Problem Statement
Under this will be a study to answer the question, “What Factors are affecting the Stock markets” and “What is the role of stock exchange in corporate governance?” Under which will be a discussion on principles that govern corporate governance. This research will also seek to answer what stock markets are and how capital markets differ between corporations and private companies. Another issue under scrutiny will be “How do corporations raise capital?”
Literature Review
In this document I will focus on stock markets as defined by (Frank J. Fabozzi, 2009), (krani, 2010)(Horne, 2004) and (Silber, 2009). Included will also be The Instruments of Capital Markets according to (Joaquim Ayuso-i-Casals, 2009), (Moorad Choudhry, 2002), (Stoica, 2006), (mapsoftheworld.com, 2013) and how they affect the capital market and the economy as recorded by (Lewellen, 1971), (Song, 2013)(Prezas, Effects of debt on the degrees of operating and financial leveragt, 1987) (Stoica, 2006) and (mapsoftheworld.com, 2013). A brief review on the U. S capital market according to (Peristiani, 2007), (al L. D., 2012), (Andrew Banks, 2013), (Driscoll, 2012) and (al D. C., 2013) and the necessary reforms as per (Singh, 1999), (Lewellen, 1971) and (Prezas, Interactions of the firm’s real and financial decisions, 1988) is available. A case study of general motors’ according to (Moore, 2009) is briefly looked into as factors to consider before trading n the stock market as recorded by (Spaulding, The Primary Bond Market, 2011), (Stein, 2013)(O'neil, 2010) and (Lewellen, 1971).
Introduction
Companies use capital markets also known as securities market to make major investments whose capital required the company cannot raise solely such as the purchase of new manufacturing plants or the construction of new buildings (White, 2013).This is through debt or equity Long term investments therefore prove useful for such purposes.
Literature has it that capital markets are divisible into Primary markets and secondary markets where by under primary markets we have stocks (new shares) sold to investors through a process known as underwriting (Anat Admati, 2013). Usually, entities involved in the primary markets are governments, which favor the sales of bonds only, and companies, which offer both bonds and equities. Secondary markets involve the trading of these previously bought shares among investors, a factor that allows investors to cash out any of their investments at will (Watson, 1986). Capital markets could also be divided into stock markets also called shares which give such an investor co-ownership of the company, and bond markets which make such investors creditors of the company involved (krani, 2010) and (Rogoff, 2010).
Capital Market and Capital Market Instruments
As I stated earlier, capital markets are financial markets through which corporations raise long-term funds. These securities could be debt or equity backed (Spaulding, Investment Banking—Issuing and Selling New Securities, 2011). Debt backed meaning the investors are the creditors to the company involved or equity backed which makes investors co-owners of such a company. I have also mentioned the two basic Capital markets are divided into primary markets in which new stock issues are sold to willing investors and secondary markets as grouped by (Sullivan & Sheffrin, 2003)which involve the trade of already existing stock and bond issues. Capital market instruments include stocks, bonds, debentures, treasury bills, foreign exchange and fixed deposits among others. As I mentioned earlier, stocks and bonds are the most commonly used instruments of stock exchange in the capital market (mapsoftheworld.com, 2013).
Stocks are used as the capital market instruments in the physical, virtual and auction markets. Bonds on the other hand are traded in a debt or credit also referred to as a fixed income market. It is in this market that debt securities are traded, and they include T-bills and debentures (Peristiani, 2007). They are the most secure but with the least returns among the other capital market instruments. Governments tend to offer exclusively bonds whereas companies offer both bonds and equities. Every capital market instrument has its benefits and risks and investors should make informed choices on where to invest, a reason as to why financial regulators check on capital markets in their jurisdictions to ensure investor protection from fraud (Frank J. Fabozzi, 2009).
The capital markets are the financial markets that buy and sell long term debts or the equity backed securities. Furthermore, the markets are used to channel savers wealth to the ones who are able to put it into a long term productive use. Such governments or companies make long term investments. Regulators of finance such as the SEC (U.S security and exchange commission) and UK bank in England will oversee capital markets in using their jurisdiction in protecting the investors against the fraud and also other duties. The modern capital markets are therefore hosted invariably on the computer based systems on electronic trading. Mainly, they are accessed by the entities which are within financial sector or governments and the corporation’s treasury department. However, the public can access some directly. Such systems exist in thousands, majority of them operating or serving as small parts of overall capital markets. The entities are hosted by the systems such as the investment banks, stock exchanges, and the departments in the government. The systems are hosted physically all over the world; nevertheless, they are seen to be concentrating on the financial centre’s e.g. Hong Kong, New York, London.
There is a key division within capital markets. The divisions are between secondary and primary markets. Under the primary markets, new bond or stock issues are always sold to the investors often through a mechanism that is known as the underwriting. The major entities that seek to raise the long term funds on primary capital markets and the governments that might be local, municipal or national and the business enterprises companies. The governments will tend to give only bonds, whereas the companies will often have an issue either bonds or equity. The major purchasing stock and bonds entities include hedge, pension, and sovereign wealth funds. Furthermore, the less commonly rich individuals and the investment banks will always trade on their behalf. On the other hand, the secondary markets, and the existing securities which are sold and then bought amongst the investors or the traders, generally over counter, exchange, or elsewhere. The secondary markets existence will increase willingness of the investors of primary markets, these is because they are able to cash out their investments when need arises.
The second vital division is placed between stock markets for the equity securities known as the shares, whereby investors acquiring the company’s ownership, also the bond markets and investors becoming creditors.
Stock Exchange
Stock exchange is the most critical component in the entire field of stock exchange. It provides an avenue for stockbrokers to trade securities, which include shares, derivatives, unit trusts, bonds, and derivatives among others (Frank J. Fabozzi, 2009). They offer facilities that allow issue and redemption of these shares when they see fit and in case they sense the possible fall of stock markets (O'neil, 2010)
According to (Stine, 2007) trade of stocks has increased rapidly as the electronic markets have overtaken the avenue of trade over the past decade. They are much easier to conduct and are preferred for their increased speed and minimal transaction costs. Just like all other markets, the supply and demand of stocks is affected by various factors, factors, which affect the supply and demand of these, stocks as well (Patterson, 2011). The many different owners of corporations allow for much better management standards and efficiency in offering services to the satisfaction of the shareholders and the rules set for public corporations by the government (Joaquim Ayuso-i-Casals, 2009). Literature proves that public companies hold better records concerning management as compared to privately owned companies (Silber, 2009).
Role of Stock Exchange in the Economy
The two main roles of stock exchange include raising capital for businesses and the mobilization of savings.
- Raising Capital for businesses
It is through stock exchanges that companies raise capital for various investments for it involves putting the savings of the public into productive use. This capital is raised by selling shares to willing investors. This is especially important for new hi-tech companies, which usually need large capital in their initial stages (Samuelson, 2001). One of the requirements of such companies to succeed in the stock exchange market is going public to form corporations so as to be able to sell shares to the public(Horne, 2004). Forming partnerships is also an option, though not for the hi-tech companies for these partnerships raise a limited amount of capital from the partners, nothing like that which corporations raise (Wray, 2012). Venture capitals are also an option of raising capital, but one that is too risky considering the financial risk assigned to one partnership. Corporate partners have been successful in providing capital for smaller and especially private companies. The corporate partner is usually an established multinational company such as the Coca-Cola Company.
- Mobilization of Savings
This involves making use of idle savings for the development of the economy. These savings are put in proper investments instead. These corporations do by issuance of shares (Prezas, Interactions of the firm’s real and financial decisions, 1988). This availability of funds promotes business activities and therefore contributes largely to a country’s economy (Singh, 1999). An example of a country whose economy greatly depends on the Capital Markets is the United States whose economy faces a threat as a result of new successful listings in the stock market which have been affecting the strength of the U. S. capital market (Peristiani, 2007).
Other functions of stock exchange include continuous availability of funds, and proper regulation of funds. They provide an avenue for investments and speed up economic growth and development of a state or country by meeting financial requirements of business houses.
Problems that Face Capital Markets
Capital markets are viewed as a very efficient form of trade, and a safe way of earning by investors through dividends. However, certain problems face capital markets leading to great losses by investors as a result of the fall of the stock prices (Stoica, 2006). As much as corporations are seen to have much better governance as compared to privately run companies, corporate mismanagement is not ruled out and companies such as General Motors (2009) and Satyam Computer Services are among many, which have been under scrutiny for mismanagement and failure as a result.
General Motors failed for its management had failed to adapt to the new circumstances that surrounded them and preferred the traditional ways of conducting business and an additional unmanageable car portfolio, which decreased its value instead. By doing this, they ignored competition from companies such as Toyota and failed to upgrade. The result was a collapse of the entire company (Moore, 2009). All this was as a result of ineffective management practices. In such instances, shareholders also suffer a great deal for they also get to share in such losses. This is because the company’s stock value declines as the company loses value.
Public capital markets in the United States for instance have been observed to be losing market as a result of competitors from overseas, a factor that is further facilitated by the online stock exchange markets. This has serious implications on the country’s economy considering that the public capital markets of the United States contribute towards the government’s revenue a great deal. One, which is very profound, is the U. S corporate bond market, which is especially facing competition from the Eurobond market (Peristiani, 2007).
The United States equity markets popularity has fallen among foreign IPO firms. However, IPO fluctuation varies from year to year and determining whether this decline is permanent may require more time as now is too early to deem it failed permanently. However, it is important to note that this decline is not absolute for it is mostly as a result of an upgrade in the other markets coming to parity with the U. S capital market enabling many equity issuers who were in the U. S market shift to their developed home markets (Peristiani, 2007).
Conditions Necessary for the Perfect Capital Market
A perfect capital market is one, which satisfies its shareholders, and at the same time gains reasonable profits from the funds it obtains from the public. A perfect capital market should therefore have certain attributes.
Tax and information asymmetries are necessary for a perfect market. As said by (Prezas, Effects of debt on the degrees of operating and financial leveragt, 1987), the right tax incentives should be those that bring forth tax asymmetries, which yield great profits. Having unique ideas is also an added advantage in increasing stock demand. Elimination of entry barriers gives a chance for all kinds of investors to be involved and with a great variety of investors; a capital market becomes attractive for other investors are certain to find exactly what they are looking for. This brings us to the other quality of the perfect capital market, which is existence of a large number of stock traders, a quality that also fosters the perfect competition (Lewellen, 1971). A good capital market should also be one whose financial assets are divisible to ensure affordability by any willing investors. The most popular markets are those with no transaction costs and tax differences, which refer to distortion of taxes favoring some investors above others. Free trading without government restrictions, especially on corporations is also an added advantage (Ronen, 1991).
Conclusion
Capital markets are necessary in every state’s economy for it encourages entrepreneurship and lifts up the economy as well. This is because people prefer to start businesses in places where capital is available, liquid assets readily available and rights to access certain capital markets not too restrictive (Korten, 2001). This is especially important with corporations, which are the main traders of stocks and the most governed by rules set by the government to prevent exploitation of investors (Bakan, 2005). The conditions that govern a capital market also have a great effect on its popularity and government support is therefore necessary. Also clear is the necessity to address problems facing a capital market such as the US capital market if the economy of a country is to be preserved (Valdez, 2009).
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