Question

Capital Markets- One of the most fundamental differences between a market economy and a centrally planned economy is the absence of capital markets in the latter. Discuss the problems of a system without the capital markets. Focus on the role of the capital markets in the “life of a firm.”

Answer 1

Problems of a system without the capital markets are illustrated by showing the role and importance of capital market. With the absence of capital markets in an economy these advantages will become drawbacks.

Capital markets allow for the businesses to raise long term funds for the firm.

It provides the public a platform for investing their savings in lucrative securities with probabilities of higher returns.

A properly structured and regulated capital market attracts foreign investment which helps in economic growth through foreign exchange reserves.

It helps diversification of business by expanding its operations and scope of business activities through availability of long term funds to finance the expansion.

Through different channels of communication the public are made aware of new investing opportunities and their existing investment’s current status and future forecast.

Capital market can be an indicator of the economic growth in an economy, through which the government can take necessary steps for better growth.