INTRODUCTION
Capital Markets are markets where long-term instruments are traded e.g. equities, preference shares, debentures etc.
A good example of a Capital Market is the Stock Exchange.
The Rwanda Stock Exchange was incorporated as a limited company 7 October 2005
MAIN FUNCTIONS
The main functions of the Stock Exchange are:
PRIMARY MARKET – used to raise new finance/issue new securities
SECONDARY MARKET – trade in second-hand securities. This is where most of the dayto-day activity takes place.
COMPANY FLOTATION
SHARE SWAP – securities used as consideration in takeover of other companies
CAPITAL PROVIDERS
The main providers of capital are:
- Pension Funds
- Insurance Companies
- Investment Trusts
- Unit Trusts
- Other Financial Institutions
- Overseas Investors
- Venture Capital Organisations
- Individuals
COMPANY FLOTATION
There are many reasons why a company may be floated on the Stock Market (“Going Public”). Chief among these is access to capital.
ADVANTAGES – SHAREHOLDERS
-
- Cash for some shares.
- Wider market for remaining shares.
- Shares perceived as less risky.
- Ready share price available.
ADVANTAGES – COMPANY
-
- Possibility of new funds.
- Better credit-standing.
- Ability to “swap shares” on a takeover.
- Ability to issue shares more easily at a later date.
- Reduced risk & greater marketability leads to lower cost of capital.
- Extra status.
- Possibility of share options for top employees.
DISADVANTAGES
-
- Costs can be quite high.
- Compliance with stringent regulations.
- Dilution of control.
- Additional administration.
- Extra scrutiny of profitability/performance.
EFFICIENT MARKETS
A market is generally regarded as efficient if the following are present:
Prices immediately reflect all relevant available information
No individual investor dominates the market
Transaction costs are not too high to discourage trading
Are the markets efficient? The Efficient Market Hypothesis (EMH) has been developed to test different levels of efficiency. [Note: Hypothesis is defined as a supposition put forward as a basis for reasoning or investigation.]
The Efficient Market Hypothesis tests three degrees of efficiency
- Weak Form Efficiency
Prices reflect the information in past stock prices.
Semi-strong Form Efficiency
Prices reflect past price information
Plus
All publicly available information.
Strong Form Efficiency
Prices reflect past price information
Plus
All publicly available information
Plus
Inside information
Most of the research suggests that capital markets are semi-strong-form efficient but not quite strong-form efficient.
