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The importance of stock market Solara H. A Kadouf Nor Azlinda bt Hani Siti Hasmah Mohamed
Presentation Outline Stock market and the components: The definition The relationship : Stock market and Economic dev The implication of financial crisis on stock market The Importance of stock market
Stock market and the components: The definition What is the Stock Market? Its functions and purposes Types of Markets Types of Securities, for e.g. traded in the Malaysian Stock Exchange Participants and Regulators
DEFINITION Stock is a share, represented by a The stock market is a The place where this certificate, in the system through which trading takes place is ownership of a the companys’ stocks, known as the Stockcompany. It represents a shares, derivatives and Exchange.claim on the companys securities are traded. assets and earnings.
FUNCTIONS AND PURPOSES The stock market is one of the most lucrative ways a company is able to raise money. Investors find the liquidity that an exchange offers; by quickly and easily selling securities, as beneficial. The health of an economy is measured by the activity of its stock market. Rising share prices affect, for example business investments and the wealth of households and their consumption.
2 MAIN TYPES OF MARKETS PRIMARY STOCK MARKET: SECONDARY STOCK MARKET: • Primary markets are markets in • Secondary stock markets are the which corporations raise funds markets in which stocks, once through new issues of stock, most issued, are traded among investors. of the time through investment • The U.S. has three major banks. secondary stock markets: • An initial public offering (IPO) is the • the New York Stock Exchange, first public issue of financial Euronext (NYSE, Euronext) instruments by a firm • the National Association of Securities Dealers Automated Quotation (NASDAQ) • the American Stock Exchange (AMEX)
TYPES OF SECURITES TRADED Common / Ordinary Stock Preferred Stock Bonus Issue Rights Issue Derivatives Warrants
EXAMPLES OF REGULATORS Examples of Regulators in the United States are the U.S. Securities and Exchange Commission (SEC). Example of Regulator in Malaysia is the Securities Commission.
3 MAJOR OBJECTIVES OF REGULATORS: • The pursuit of macroeconomic and microeconomic stability, i.e. the legally required amount of capital and 1. borrowing limits of the company. • To provide transparency in the market and in the 2. intermediaries as well as investor protection. • To provide efficiency at a macro level by way of safeguarding the promotion of competition among 3. financial intermediaries.
The importance of financial intermediaries deposits Bank financing Equity financing Diversify risk and maintain liquid investmentsEFFICIENT ALLOCATION OF CAPITAL
Relationship between stock market and economic growth Stock market promotes diversification for investments and efficient allocation of resources that contribute to the economy growth Diversify investments = diversify from specific risks Alternative financing / investment avenue for investors Stiglitz (1989) and Mayer (1989) – Existence of stock market has little relevance to real economy Principal agent theory problem Efficient stock market may mitigate the moral hazard problem and increase productivity Principal linkage between stock market and economy growth is LIQUIDITY PROVISION of the market Crucial feature of stock market Provide channel for more efficient corporate governance and resource allocation (capital are allocated to the most productive and innovative firms) Levine and Zervos (1998) research on the relationship Period coverage: 1976 to 1993 Indicators: GDP, stock mkt cap, value of stocks traded (liquidity), stock mkt volatility Results: Equity market activity are positively correlated with real activity Liquid and developed stock market have close and positive linked with economic growth Volatile stock market have negative real effects to the economy
The linkages: Stock market and economy growth • Attract > demand High for investment confidence • Higher share price on • Higher profit soundness generation of economy • Lower real activity • Lower real Dampening the investment Investment • Lower real climate activity • Unemployment
The implication of financial crisis on stock market • Stock selloff – plunging stock price • Plunge in exports and commodity prices • Shrink in foreign direct investments and portfolio flows • Increase cost of borrowing • Deteriorating investors’ confidence
World map showing GDP real growth rates for 2009 Denmark Russia Canada Iceland EU countries US MexicoGDP growth Argentina Source: CIA World Factbook Countries in brown were in recession
The TED spread (an indicator of perceived credit risk in the general economy),spiked up in July 2007, remained volatile for a year, then spiked even higher in Sept2008, reaching a record 4.65% in Oct 2008.
The Importance of stock market - Individual Offers individual with alternative to generate extra income apart from their daily job. i. Dividend earned ii.Gain from selling off the stocks in the event stock price increase. Creates investment opportunity for small investors Investing in stock does not limit the individuals from buying the stock either in large amount or small amount because individual buys the number of shares they can afford. Stock market helps to reduce large income inequalities Everybody has a chance to share in the profits of promising business that were set up by other people.
The Importance of stock market - Individual Investing in stock provides high liquidity in nature to individual. Enables the stockholder to buy or sell their investment at any time in order to obtain cash. Stock market enables individual to increase personal wealth via dividend received from investment or proceed from selling of stocks. Federal Reserve Bank of New York Economic Policy Review in 1997 revealed that the cumulated value of increases in household wealth from year 1952 to 1997 had a positive correlation with the cumulated value of household capital gains on the stock market.*
The Importance of stock market - Companies Enable company to increase capital by issuing stock to public. Alternative way to finance their business expansion beside apply financing with financial institution. Increase public awareness to the companies. A listing on a stock exchange can add value to a company by giving brand awareness to the public. Public are more aware of the products and businesses of the companies.
The Importance of stock market - Companies Raise capital through stock market give advantage in term of low cost of capital. Abstains from a number of the intermediation expenses apparent in the other forms of capital rising. Stock market provides the opportunity for companies to access to a widespread shareholder/ investor base. The company that listed has a wide range of investors, which may contain of both local and international investors.
The Importance of stock market – Fund ManagementCompanies (FMC) Fund Management Companies is a company provides management services or investment advices or administrative services in respect of securities for the purpose of investment. The company bring together money from many people in pool and invest it in stocks, bonds or other assets. Example of fund management companies are investment trust and pension fund company.Importance The stock market allows FMC to allocate the investors’ pool of fund to diversified stocks offered in stock market. Stock market gives advantage for FMC to position investor cash strategically. To be listed in the stock market, companies need to disclose their financial positions and their business background. Give benefit to FMC to analyze the companies before invest the fund.