ACCT372 – CHAPTER 14 – CAPITAL MARKETS

Our market-based financial system has developed because of private enterprise and the accumulation of
wealth or capital. The study of financial management suggests the pursuit of shareholder wealth as the
goal of the firm with wealth evidenced by the financial claims that individuals have against real assets to
generate cash flows. Financial claims are represented by the financial assets (capital) issued by
businesses and governments as debt or equity securities.

Capital or security markets facilitate the accumulation of capital by providing opportunities for investors
and borrowers to get together. Security instruments are bought and sold in markets around the globe
based on their risks and returns, with intense competition to raise funds. Investors use the markets to
provide future income.

Capital moves quickly in today`s markets seeking out the best returns. The developments of the
European Common Market (with a central bank, common currency, and free trade), NAFTA, and the rise
of Chinese capitalism increase the competition for funds on a global scale. As the mobility of capital
increases it is incumbent on governments and regulatory agencies to ensure the fair operation of the
security markets. When investors perceive that the markets are unfair and financial investments do not
properly reflect the risks and returns, then capital accumulation is inhibited.

Variables that effect capital markets include: interest rates, investor’s confidence and economic
growth

A market for a company’s equity is called a capital market because equity is a LONG term security

Capital Markets – serve as a way of allocating the available capital to the most efficient user

INTERNALLY GENERATED FUNDS – retained earnings and accounting expense amounts for amortization

NET DEMANDER OF CAPITAL – government and corporations

EFFICIENT MARKET – reflects all publicly available information

BONDS – form part of firm’s capital structure

ECN’s are different from traditional exchanges because – they do not have physical trading loor and if a
sell order doesn’t match a buy order the order will not execute

INDIRECT INVESTMENT – personal income saved and funneled to financial intermediaries