The Role of the Securities Market.
For rapid economic development both direct and indirect financing should be considered complementary. The efficient and effective operation of the securities market is required to meet at least two basic requirements.
The Role of the Securities Market
The first one is to support industrialization through savings mobilization, investment fund allocation, and maturity transformation.
The second one is to be safety and efficiency in discharging the above role.
In a developing country like Bangladesh, such conditions do not prevail due to the prevalence of informal credit markets. The recent development towards privatization seeks the need of efficient capital markets. It performs various functions in the process of economic development. The securities markets provide both savers and users with a broad spectrum of investment choices that can increase the level of both savings and investment.
Securities markets can attract the investors as it offers a higher return to the investment portfolio. This investment portfolio easily can draw more savers in the investment process that in turn involves institutions like brokerage houses, investment banking, money investing firms, etc.
Under the scheme of Foreign Direct Investment (FDI), securities markets attract external sources in the capital market. Entrepreneurs are supposed to be provided capital procuring other factors of production that would ensure full-employment and create more productive capacity in the economy. A securities market can achieve this type of objective.
Securities markets can augment the growth; development and stability of a country’s financial structure increase the allocation of savings, allocation of existing real wealth and ensure the distribution of income.
In the economic development of a country, the problem is mainly two-fold viz., increase or creation of domestic savings and transformation of more funds to an investment. Securities markets can ensure efficient allocation of savings to productive investment by the creation/development of money and capital market. The Role of the Securities Market in the context of Bangladesh plays a vital role.
In the economic sense, capital formation is the change in the stock of the capital goods represented by producers’ durable equipment and business inventories. In a modern capitalistic economy, capital formation would be impossible without a market or group of markets for the transfer of savings to those seeking funds for investment in economic goods and services.
In this connection, a variety of instruments representing money and claims to money are employed. Savers provide the funds and in return expect to receive dividends, interest, or rent and the investors offer the hope of income and price appreciation. In the financial sense, a securities market is the market for instruments representing longer-term funds. It consists of institutions and mechanisms whereby intermediate-term funds and long-term funds are pooled and made available to businesses, government, and individuals, and where outstanding instruments are transferred.
On the other hand, the money market focuses on debt instruments only with maturities ranging from one day to one year. It is engaged in purchasing and selling of new instruments rather than trading in outstanding claims. In financial terminology, the investment market includes the markets for funds both short and long term. Both long term and short term segment of the investment market include the primary sale and purchase of and secondary transactions in instruments. Business firms invest capital in amounts that are beyond their capacity to save in any reasonable period of time.
The securities market plays a crucial role in the proper functioning of the capitalistic economy. They serve to channel funds from savers to borrowers. Another important function that the securities market does is the allocation function by channeling funds to those who can make the best use of them. The existence of the secondary market ensures the purchasers of the primary securities that they can quickly sell their securities. Since there are no guarantees in the financial market, sales may involve losses. Such a loss may be much preferred to having no cash at all if the securities cannot be sold readily.
The Role of the Securities Market