Financial Management
The role and importance of capital markets and EMH
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Seminar paper from the year 2010 in the subject Business economics - Investment and Finance, grade: 1.0, University of Sunderland, language: English, abstract: The role and importance of capital markets and EMHCrisp plc has to attract investments from capital markets.A capital market is simply any market where a government or a company (usually acorporation) can raise money (capital) to fund their operations and long term (periods longerthan a year) investment.[1] Usual, short-term funds can be founded on other markets (e.g., themoney market). The capital market consists of the stock market (e...
Seminar paper from the year 2010 in the subject Business economics - Investment and Finance, grade: 1.0, University of Sunderland, language: English, abstract: The role and importance of capital markets and EMHCrisp plc has to attract investments from capital markets.A capital market is simply any market where a government or a company (usually acorporation) can raise money (capital) to fund their operations and long term (periods longerthan a year) investment.[1] Usual, short-term funds can be founded on other markets (e.g., themoney market). The capital market consists of the stock market (equity securities) and the bondmarket (debt). Bonds and stocks are two ways to generate capital of any company.New issues of bonds and stocks are placed on primary capital markets by way ofunderwriting among investors. All money, received during underwriting, goes to company (Crispplc) for its investment purposes.And placed bonds and stocks are sold and bought among other investors or tradersin thesecondary capital markets (a securities exchange, over-the-counter, or elsewhere). The prices ofsecurities (both bonds and stocks) on secondary markets are reflected «real» price of company.It is good benchmark for primary placements of additional issues of bonds and/or stocks (furtherextension of the company).Crisp plc is going to issue bond or stocks. It means that it attract money from primarymarkets. Here very important thing is true price of bonds and/or stocks of Crisp plc, i.e. price hasto be interesting for investors and allows to attract maximum of money.As stated above, prices of securities on secondary markets are reflected «real» price ofcompany from point of view of investors. Here the efficient-market hypothesis (EMH) playsvery important role, because it is the tool of securities pricing of off-site investors (which areoutside of the company).According to the efficient-market hypothesis (EMH), which was developed by ProfessorEugene Fama, financial markets are «informationally efficient».[2] It means that prices on tradedassets are «real» and already reflect all known information. Prices change to reflect newinformation (for example, new investment program of the company). Consequently, it isimpossible to consistently outperform the market by using any information that the marketalready knows. Information or news in the EMH is defined as anything that may affect pricesthat is unknowable in the present and thus appears randomly in the future.
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