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Real World Capital Markets Are Neither Completely Segmented nor Integrated, but Fall Somewhere in Between

In: Business and Management

Submitted By ali4ever30
Words 1101
Pages 5
• Importance of Stock Markets and Connection to the Countries’ Economies “Financial markets perform the essential economic function of channeling funds from households, firms, and governments that have saved d surplus funds” (Mishkin, 2009, p.25).The primary economic functions of financial markets are; price discovery, liquidity, and reduced transactional costs (Drake & Fabozzi, 2010).
Stock markets are vital for business as they directly impact on decision making in that price discovery of shares directly influences “the amounts of funds that can be raised by selling newly issued stock to finance investment spending” (Mishkin, 2009, p.5). Furthermore, the liquidity enables investors’ trade.
There is a ready market for assets that can be done through primary and/or secondary equity markets. They reduce transaction costs in the sense that explicit and implicit costs in connecting different counterparties are eliminated (Drake & Fabozzi, 2010). It effectively acts as a meeting point for buyers and sellers of different asset classes to connect.
The regulatory element means that all the transactions executed in stock markets are secure and meet certain defined standards that obligate the counterparts to accede to. Ludvigson & Steindel (1999) undertook empirical studies that revealed the correlation between stock market importance and its effect on consumption.
They noted that cyclical movements of the stock markets had direct impact on consumption trends. Essentially, during weak stock market performance, as witnessed during the global financial crisis of 2008/09, consumer spending nosedived. Consumer spending directly impacts on economic performance as companies function for this reason.
Stock markets directly benefit the economy by enabling the efficient allocation of capital and also spread risks (Caporale, Howells, & Soliman, 2004). They also allow for...

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