Establishing equity markets

Description

Establishing equity markets involves creating organized platforms for buying and selling company shares, enabling businesses to raise capital and investors to participate in economic growth. This strategy addresses limited access to funding, fosters transparency, and encourages corporate governance. By facilitating investment and liquidity, equity markets support economic development, diversify financial systems, and provide mechanisms for price discovery and risk management, thereby remedying inefficiencies and barriers in traditional financing channels.

Context

An equity market widens the options to savers by offering high-return, high-risk financial assets. By competing for funds with the rest of the financial sector, it may increase the total supply of savings. In addition, it improves the allocative efficiency of the financial sector by giving firms greater access to risk finance, brings a new element of competition to the financial sector and thus provides firms with an alternative to long-term borrowing, and improves the flow of financial information. For an equity market to work properly, rules on trading, intermediation, information disclosure and takeovers need to be clear. The investing public needs to be protected from stock market manipulation, and brokers and underwriters need to follow professional codes of conduct.

A capital market depends on the health of the economy. A well-developed banking system and macro-economic stability are preconditions for its growth. In addition, government can avoid discriminating against the development of an equity market by taxing dividends and capital gains on equity at the same rate as the returns on other financial investments.

Implementation

Thirty-five developing countries have active equity markets.

Claim

If firms do not have sufficient equity to absorb financial shocks they rely on borrowed funds. A well-functioning equity market would ease their difficulties.