DEBRE BIRHAN UNIVERSTY

COLLAGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGMENT

COURSE: FINANCIAL INSTITUTIONS AND

INVESTMENT MANAGEMENT

COURSE CODE :MBA642

TITTLE: Establishment of Stock Market

SUBMITED TO SISAY / PHD

SUBMITTED BY YONAS TEKLE

ID/No DBU1400594
APRIL 2023

DEBRE BIRHAN

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Introduction

The stock market is a marketplace where individuals and institutions buy and sell securities, such
as stocks, bonds, and other financial instruments. The establishment of the stock market can be
traced back to the 17th century when the first stock exchange was founded in Amsterdam in
1602. It was established to facilitate trading in the shares of the Dutch East India Company.
The concept of the stock market was later adopted in other countries, including the United States,
where the New York Stock Exchange (NYSE) was founded in 1792. Today, there are numerous
stock exchanges worldwide, and they play a crucial role in the global economy by providing a
platform for companies to raise capital and for investors to earn returns on their investments.
The stock market has evolved over time, with advancements in technology enabling faster and
more efficient trading. It has also witnessed several ups and downs, with periods of growth and
prosperity followed by periods of decline and recession. Despite this, the stock market remains
an important part of the global financial system, providing a means for companies to grow and
investors to generate wealth.
In the Ethiopian context, the historical development of stock market traces its roots back to the
Imperial period. During this time, Ethiopia managed to develop the institutions of stock market,
such as the ―Addis Ababa Share Dealing Group‖. However, after the demise of the Imperial
regime, the stock market was abolished due to the introduction of command economy. Since
then, except Commodities Market Exchange for agricultural products under the current regime,
no stock market has been legally designed to trade stocks except for the fragmented and
unregulated stock trading in a dealer market.
In general, a stock market is an open marketplace which provides facilities for stockbrokers,
investors and corporations to trade in stocks. Stock markets generally provide the means by
which companies raise capital to start new business or expand the existing business by offering
new stocks to the public. It also provides a trading facility for investors to sell their share
ownership in corporations. Unlike the bond market, stock market provides an opportunity for
companies to finance their business through equity investment.

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 Definition, characteristics and Function
Meaning of Capital market:
Capital markets are financial markets for the buying and selling of long-term debt or long term
securities having a maturity-period (age) of one year or more. These markets channel/direct the
wealth of savers to those who can put it to long-term productive/useful use, such as companies or
governments making long-term investments/capital spending. Financial regulators/watchdogs
such as the Securities and Exchange Board of India (SEBI), oversee/direct the capital markets in
their jurisdictions/areas to protect investors against fraud/dishonesty among other duties.
Definition of Capital market:
Capital market is a market for long-term funds-both equity and debt-and funds raised within and
outside the country. The capital market aids economic growth by mobilizing the savings and
directing the same towards productive use. This is facilitated through the following measures or
ways: 1.Issue of „primary securities‟ in the primary market,‟ i.e., directing cash flow from the
surplus sector to the deficit sectors such as the government and the corporate sector. 2.Providing
liquidity and marketability of outstanding debt and equity instruments.
Features/Characteristics of Capital Market:
1. Link between savers and investors: The capital market acts as an important link between
savers and investors. The savers are lenders of funds while investors are borrowers of funds. The
savers who do not spend all their income are called “Surplus units” and the investors/borrowers
are known as “deficit units”. The capital market is the transmission mechanism between surplus
units and deficit units. It is a conduit through which surplus units lend their surplus funds to
deficit units.
2. Deals in Long Term fund: Capital market provides funds for long and medium term. It does
not deal with channelizing saving for less than one year.
3. Utilizes Intermediaries: Capital market makes use of different intermediaries such as brokers,
underwriters, depositories etc. These intermediaries act as working organs of capital market and
are very important elements of capital market.
4. Capital formation: The capital market prides incentives to savers in the form of interest or
dividend to transfer their surplus fund into the deficit units who will invest it in different
businesses. The transfer of funds by the surplus units to the deficit units leads to capital
formation. 5. Government Rules and Regulations: The capital market operates freely but under
the guidance of government policies. These markets function within the framework of
government rules and regulations, e.g., stock exchange works under the regulations of SEBI
which is a government body.
Importance or Functions of Capital Market:
The capital market plays an important role in mobilizing saving and channel them into
productive investments for the development of commerce and industry. As such, the capital

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market helps in capital formation and economic growth of the country. We discuss below the
importance of capital market.
1. Link between savers and investors: The capital market acts as an important link between
savers and investors. The savers are lenders of funds while investors are borrowers of funds. The
savers who do not spend all their income are called “Surplus units” and the investors/borrowers
are known as “deficit units”. The capital market is the transmission mechanism between surplus
units and deficit units. It is a conduit through which surplus units lend their surplus funds to
deficit units.
2. Basis for industrialization: Capital market generates long term funds, which are essential for
the establishment of industries. Thus, capital market acts as a basis for industrialization.
3. Accelerating the pace of growth: Easy and smooth availability of funds for medium and long
period encourages the entrepreneurs to take profitable ventures/businesses in the field of trade,
industry, commerce and even agriculture. It results in the all round economic growth and
accelerates the pace of economic development.
4. Generating liquidity: Liquidity means convertibility into cash. Shares of the public
companies are transferable i.e., in case of financial requirements these shares can be sold in the
stock market and the cash can be obtained. This is how capital market generates liquidity.
5. Increase the national income: Funds flow into the capital market from individuals and
financial intermediaries which are absorbed by commerce, industry and government. It thus
facilitates the movement of stream of capital to be used more productively and profitability to
increase the national income.
6. Capital formation: The capital market prides incentives to savers in the form of interest or
dividend to transfer their surplus fund into the deficit units who will invest it in different
businesses. The transfer of funds by the surplus units to the deficit units leads to capital
formation.
7. Productive investment: The capital market provides a mechanism for those who have savings
transfer their savings to those who need funds for productive investments. It diverts resources
from wasteful and unproductive channels such as gold, jewelry, conspicuous consumption, etc.
to productive investments.
8. Stabilization of the value of securities: A welldeveloped capital market comprising expert
banking and non-banking intermediaries brings stability in the value of stocks and securities. It
does so by providing capital to the needy at reasonable interest rates and helps in minimizing
speculative activities.
9. Encourages economic growth: The capital market encourages economic growth. The various
institutions which operate in the capital market give quantities and qualitative direction to the
flow of funds and bring rational allocation of resources. They do so by converting financial
assets into productive physical assets. This leads to the development of commerce and industry
through the private and public sector, thereby encouraging/inducing economic growth.

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Understanding How Capital Markets Work
Capital markets play a crucial role in society, providing companies with the money to grow,
mature businesses with new capital for expansion, and private citizens with opportunities to
invest in financial instruments.
Companies typically raise capital by issuing stock or bonds through an investment bank, which
then makes these securities available for purchase by investors on a public exchange like
the New York Stock Exchange (NYSE) or over-the-counter.
The role of capital markets is to match savers and borrowers. Lenders that have extra funds can
put them to work in investments that will provide a return that is larger than the interest they
would earn from a savings account.
Individuals, corporations, and governments all borrow money for various reasons - purchasing
equipment or funding new projects, expanding production capacity, entering new markets,
reducing financial risk, etc.
Conversely, lenders receive interest on their loaned capital or dividends from shares of stock.
The relative availability of capital drives interest rates up or down, depending on the demand for
borrowing. Capital markets allow these transactions to take place on a large scale by bringing
together those who have money to lend with those who need it.
Types of Capital Markets
Stock Markets
In a stock market, investors buy or sell shares of publicly traded companies.
Investors buy shares because they hope the company will succeed and the stock price will rise,
increasing the market value of their investment.
Companies list shares on exchanges so they can raise capital to fund expansion or projects. They
also do so to give investors an opportunity to buy or sell securities with relative ease through
brokers who are members of that exchange.
Bond Markets
In a bond market, lenders provide funds to borrowers by buying their bonds for cash or by
purchasing them via a broker with the understanding that they will be repaid with interest at a
later date along with the original loan amount.
Individuals use bond markets when looking for safe investments that pay more than money in
savings accounts or CDs.
Commodity Markets
In a commodity market, investors buy commodities such as gold, oil, and wheat to gain value
through future price appreciation. Commodities are raw materials that can be bought and sold
via futures contracts or options on futures contracts.
Foreign Exchange (Forex) Markets

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The forex market enables companies to purchase foreign currencies at specified prices for the
purpose of making international purchases or sales, transferring funds across international
borders, hedging exchange rate risk on investments in foreign countries, etc.
Currency values fluctuate relative to one another, providing players in this market with
opportunities to make money buying low and selling high.
Primary vs Secondary Capital Markets
A primary market is one in which securities are first offered to the public through an Initial
Public Offering (IPO).
Companies that want more capital than they can raise from private individuals often go public
and sell shares of their stock on a stock exchange, such as the NYSE. The company gets cash and
buyers get stocks or bonds in a promising company.
After its IPO, a stock may also be traded over the counter on what is called secondary markets.
Customers on these exchanges buy and sell stocks among themselves rather than trade them
directly with the issuing company or other investors/members of the
exchange. The SEC regulates both primary and secondary markets.
Essence of stock market
The stock market is a platform where individuals and institutions can buy and sell shares of
publicly traded companies. It is a place where investors can participate in the growth and success
of businesses, and where companies can raise capital to expand their operations. The essence of
the stock market lies in its ability to facilitate the exchange of ownership in businesses, allowing
investors to benefit from the profits and growth of those businesses. It also serves as a barometer
of economic activity and investor sentiment, with fluctuations in stock prices reflecting changes
in the overall health of the economy and the confidence of investors. Ultimately, the stock
market plays a critical role in driving economic growth and providing opportunities for
individuals to build wealth through investment. but also comes with risks such as volatility and
fraud. Investors need to do their due diligence and stay informed about market conditions and
individual companies before making investment decisions. Regulatory measures are necessary to
ensure a fair and transparent marketplace for all investors.
The essence of the stock market can be summarized as follows:
1. Raising Capital: The stock market allows companies to raise capital by selling shares of
ownership to investors. This capital can then be used to fund business operations, expansion
plans, research and development, and other growth initiatives.
2. Trading Platform: The stock market provides a platform for investors to buy and sell shares of
publicly traded companies. This creates liquidity for investors and enables them to convert their
holdings quickly and easily into cash.
3. Price Discovery: The stock market serves as a mechanism for determining the fair value of
publicly traded companies based on supply and demand. The price of a company's shares reflects
the collective opinions of investors regarding the company's future prospects.

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4. Risk and Return: The stock market offers investors the potential for high returns on their
investments, but also carries a significant amount of risk. Investors must carefully evaluate the
risks associated with investing in individual stocks or mutual funds before making investment
decisions.
5. Economic Indicator: The performance of the stock market is often used as an economic
indicator of overall economic health. A strong stock market is generally seen as a sign of a
healthy economy, while a weak stock market may indicate economic uncertainty or recession.
Opportunities:
1. Potential for high returns: The stock market offers the potential for high returns on investment,
especially over the long term.
2. Diversification: Investing in the stock market allows investors to diversify their portfolio and
spread their risk across multiple companies and industries.
3. Access to capital: The stock market provides companies with access to capital through the
issuance of securities, which can be used to fund growth and expansion.
4. Economic growth: A healthy stock market can contribute to overall economic growth, as
companies raise capital and create jobs.
Challenges:
1. Volatility: The stock market is subject to volatility, with prices fluctuating rapidly in response
to various factors such as economic conditions, political events, and company performance.
2. Fraud and misconduct: There is a risk of fraud and misconduct in the stock market, such as
insider trading or accounting fraud, which can harm investors and undermine confidence in the
market.
3. Lack of transparency: Companies may not always provide accurate and timely information to
investors, which can make it difficult for investors to make informed decisions.
4. Limited access: Not all investors have equal access to the stock market, with some individuals
and groups having greater resources and information than others.
5. Regulatory challenges: Regulating the stock market can be challenging, as regulations must
balance the need for investor protection with the need for market efficiency and innovation.
OPPORTUNITIES IN ESTABLISHING SECONDARY MARKETS IN ETHIOPIA
The current realities of the Ethiopian economy have many favorable conditions (opportunities)
that can pave the way for security market development. This includes Ethiopian-specific
advantages, favorable macro-economic and social conditions, increased interest of foreign
investors, the Growth and Transformation Plan (GTP), financial sector development, enhanced
saving and investment potential, increased private sector participation, and high enthusiasm
among stakeholders.
INCREASED INTEREST OF FOREIGN INVESTORS
The current high enthusiasm among foreign investors in Ethiopia is a great opportunity to open

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up the security markets. With the opening of such markets the number of companies issuing
shares and get listed in stock exchange will increase. This in turn will make the market vibrant,
active and liquid and will further attract more foreign investors.
GROWTH AND TRANSFORMATION PLAN
The Ethiopian government drafted a new 5-year (2010-2014) Growth and Transformation Plan
(GTP) that strives to change the country's economic structure in more fundamental way from
agrarian based to modern industrial based economy. Implementation of GTP requires huge
financial resources. As one of the ways of augmenting internal resources, saving mobilization is
given much emphasis in the plan. The GTP triggers the development of security markets that are
known to mobilize small household savings.

FINANCIAL SECTOR DEVELOPMENT

The banking sector is growing phenomenally. Both public and private banks open new branches
in a phased manner. New market players like microfinance institutions catering to the urban poor
and rural areas are also increasing the access to finance. Banking sector development is
instrumental to security market development and this is considered as excellent opportunity to
develop such markets.
ENHANCED SAVING AND INVESTMENT POTENTIAL
As a result of continued economic growth over the past years, the people's capacity to save is
increasing and this can be considered as good opportunity to attract many investors to security
markets. The financial institutions like the pension fund, insurance companies, and credit unions,
are with large sums of money and if they are allowed to invest in secondary market, such
investment would boost the demand for securities.
INCREASED PRIVATE PARTICIPATION
The level of private sector development is increasing continuously owing to improved business
environment conditions. As a result, many companies are issuing shares to the public and this
can be seen as nice opportunity to begin organized security markets
CHALLENGES IN ESTABLISHING SECONDARY MARKETS IN ETHIOPIA
Though it is highly laudable, the launch of security market is not without challenges. Some of the
major challenges include Low Quality and Quantity of Financial Services, Paucity in
Communication Network, Policy Measures Impetus, Gaps in Accounting, Auditing and Legal
Infrastructure, Low level of saving and financial literacy, Inadequacies in skilled manpower, and
Forms of Business Organizations.
QUALITY AND QUANTITY OF FINANCIAL SERVICES
Banking system in Ethiopia is still in infant stage due to limited products range, poor outreach
and weak inter-bank markets. The major financial products of the banking systems are saving
and loan products. There are no many varieties even with such basic products. The use of check
as a payment system is restricted only for current accounts. There is no full-fledged check-
clearing facility across the country.While coming to the outreach at the end of First Quarter of
2010/11, Ethiopia had 712 bank branches all over the country, out of which 275 were in Addis
Ababa. This means the bank branch to population ratio is 112,000 which is one of the poorest in
this continent. Similarly there were only 209 branches of 13 insurance companies making one
insurance branch to serve nearly 383,000 people.

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PAUCITY IN COMMUNICATION NETWORK
Ethio-Telecom is the sole authority providing telecommunication services in the country. No
other private players are currently operating in this field. For fast and smooth service, banks need
highly developed communication network. Private Banks in particular feel that one of the
impediments for the expansion of their branch network is the inadequate communication network
across the country.
POLICY MEASURES IMPETUS
The policy related challenges includes lack of tax incentives for security market participants
such as investors, firms and intermediaries which otherwise can be used to promote such
markets, lack of awareness and willingness among the policy makers to push for such markets,
prohibition of foreigners to participate in the financial sector of the country and low level of
market orientation in the economy.
GAPS IN ACCOUNTING, AUDITING AND LEGAL INFRASTRUCTURE
Accounting and auditing standards in Ethiopia are not of a high and international acceptable
quality. Share companies are not required to include audited financial statements. As there is no
public offering and listing, there are no requirements regarding publicly available annual reports
and their preparation and presentation in accordance with a comprehensive body of accounting
standards.. Even without reporting requirement, there is general unwillingness among Ethiopian
businessmen to provide financial information of any nature to the needy. As a result, the data
compiled for private businesses do not reflect the true picture in most situations. Such data
shortages and inaccuracies significantly affect researches made in accounting and finance areas
and lead to errors policy making.Unlike other countries, information is not made available on the
websites too, except for public and government undertakings. Often in many cases, the
information provided is too outdated to be useful for any meaningful conclusion. Laws and
institutions governing corporations, securities and investors are insufficient according to
international best practices and standards.The 1960 Commercial Code of Ethiopia is not up to
date and has many grey areas. The registration of patents and trademarks are non-existent. The
judiciary is poorly staffed and inexperienced in commercial cases.
LOW LEVEL OF SAVING AND FINANCIAL LITERACY
There is low saving rate in the country due to poor saving culture and weak saving capacity (a
result of low per capita income). As the financial literacy of those participating in security
markets seems to be poor, there is a strong and immediate demand to support financial literacy as
soon as possible.
LIMITED FORMS OF BUSINESS ORGANIZATIONS
Most business organization forms in the country are sole-proprietorship or private limited
companies rather than share companies. This is partly attributed to the owners need to maintain
tight control over the firm and the perception by many companies that the risks associated with
additional disclosure are not adequately compensated by additional returns. Since banks do not
require public disclosure like the stock market does, many firms would prefer to remain
privately-held and source their capital from banks. These firms cannot be expectedto use the

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services of stock market. The government should encourage privately owned companies to go
public through tax and other motivational measures.
it is important to note that the stock market can be both a source of opportunity and a challenge.
It offers the potential for high returns and diversification, but it also comes with risks such as
volatility and fraud. It is crucial for investors to do their due diligence and stay informed about
market conditions and individual companies before making investment decisions. Additionally,
regulatory measures are necessary to ensure a fair and transparent marketplace for all investors.

REFERENCES
Ruecker R. and Shiferaw K. (2011). A market potential assessment and road map development
for the establishment of a capital market in Ethiopia,
Ethiopian and Addis Ababa Chamber of Commerce and Sectoral Associations, Private Sector
DevelopmentHub
16. Tessema, A. (2003). Prospects and Challenges for Developing Securities Markets in
Ethiopia: An
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