Presentation on Stock market and growth

1. The importance of stock market
Solara H. A Kadouf
Nor Azlinda bt Hani
Siti Hasmah Mohamed

2. Presentation Outline
Stock market and the components: The definition
The relationship : Stock market and Economic dev
The implication of financial crisis on stock market
The Importance of stock market

3. Stock market and the components: The definition
What is the Stock Market?
Its functions and purposes
Types of Markets
Types of Securities, for e.g. traded in the
Malaysian Stock Exchange
Participants and Regulators

4. DEFINITION
Stock is a share,
represented by a The stock market is a
The place where this
certificate, in the system through which
trading takes place is
ownership of a the companys’ stocks,
known as the Stock
company. It represents a shares, derivatives and
Exchange.
claim on the company's securities are traded.
assets and earnings.

5. FUNCTIONS AND PURPOSES
 The stock market is one of the most lucrative ways a company
is able to raise money.
 Investors find the liquidity that an exchange offers; by quickly
and easily selling securities, as beneficial.
 The health of an economy is measured by the activity of its
stock market.
 Rising share prices affect, for example business investments
and the wealth of households and their consumption.

6. 2 MAIN TYPES OF MARKETS
PRIMARY STOCK MARKET: SECONDARY STOCK MARKET:
• Primary markets are markets in • Secondary stock markets are the
which corporations raise funds markets in which stocks, once
through new issues of stock, most issued, are traded among investors.
of the time through investment • The U.S. has three major
banks. secondary stock markets:
• An initial public offering (IPO) is the • the New York Stock Exchange,
first public issue of financial Euronext (NYSE, Euronext)
instruments by a firm
• the National Association of
Securities Dealers Automated
Quotation (NASDAQ)
• the American Stock Exchange
(AMEX)

7. TYPES OF SECURITES TRADED
 Common / Ordinary Stock
 Preferred Stock
 Bonus Issue
 Rights Issue
 Derivatives
 Warrants

8. PARTICIPANTS
 Individuals
 The firms/companys
 The Government
 Regulators
 Market Intermediaries
 Underwriters
 Investment banks
 Investment companies
 Share Brokers
 Securities Firms
 Insurance companies

9. EXAMPLES OF REGULATORS
 Examples of Regulators in the United States are the U.S.
Securities and Exchange Commission (SEC).
 Example of Regulator in Malaysia is the Securities
Commission.

10. 3 MAJOR OBJECTIVES OF REGULATORS:
• The pursuit of macroeconomic and microeconomic
stability, i.e. the legally required amount of capital and
1. borrowing limits of the company.
• To provide transparency in the market and in the
2.
intermediaries as well as investor protection.
• To provide efficiency at a macro level by way of
safeguarding the promotion of competition among
3. financial intermediaries.

11. The importance of financial intermediaries
deposits Bank financing
Equity financing
Diversify risk and maintain liquid investments
EFFICIENT ALLOCATION OF CAPITAL

12. Relationship between stock market and economic growth
 Stock market promotes diversification for investments and efficient
allocation of resources that contribute to the economy growth
 Diversify investments = diversify from specific risks
 Alternative financing / investment avenue for investors
 Stiglitz (1989) and Mayer (1989) – Existence of stock market has little
relevance to real economy
 Principal agent theory problem
 Efficient stock market may mitigate the moral hazard problem and increase
productivity
 Principal linkage between stock market and economy growth is LIQUIDITY
PROVISION of the market
 Crucial feature of stock market
 Provide channel for more efficient corporate governance and resource allocation
(capital are allocated to the most productive and innovative firms)
 Levine and Zervos (1998) research on the relationship
 Period coverage: 1976 to 1993
 Indicators: GDP, stock mkt cap, value of stocks traded (liquidity), stock mkt volatility
 Results:
 Equity market activity are positively correlated with real activity
 Liquid and developed stock market have close and positive linked with economic growth
 Volatile stock market have negative real effects to the economy

13. The linkages: Stock market and economy growth
• Attract > demand
High for investment
confidence
• Higher share price
on
• Higher profit
soundness generation
of economy
• Lower real activity
• Lower real
Dampening the investment
Investment
• Lower real
climate activity
• Unemployment

14. The implication of financial crisis on stock market
• Stock selloff – plunging stock price
• Plunge in exports and commodity prices
• Shrink in foreign direct investments and portfolio flows
• Increase cost of borrowing
• Deteriorating investors’ confidence

15. World map showing GDP real growth rates for 2009
Denmark
Russia
Canada
Iceland EU
countries
US
Mexico
GDP growth
Argentina
Source: CIA World Factbook
Countries in brown were in recession

16. The TED spread (an indicator of perceived credit risk in the general economy),
spiked up in July 2007, remained volatile for a year, then spiked even higher in Sept
2008, reaching a record 4.65% in Oct 2008.

17. The Importance of stock market - Individual
 Offers individual with alternative to generate extra income
apart from their daily job.
 i. Dividend earned
 ii.Gain from selling off the stocks in the event stock price
increase.
 Creates investment opportunity for small investors
 Investing in stock does not limit the individuals from buying the
stock either in large amount or small amount because individual
buys the number of shares they can afford.
 Stock market helps to reduce large income inequalities
 Everybody has a chance to share in the profits of promising
business that were set up by other people.

18. The Importance of stock market - Individual
 Investing in stock provides high liquidity in nature to
individual.
 Enables the stockholder to buy or sell their investment at any
time in order to obtain cash.
 Stock market enables individual to increase personal
wealth via dividend received from investment or proceed
from selling of stocks.
 Federal Reserve Bank of New York Economic Policy Review
in 1997 revealed that the cumulated value of increases in
household wealth from year 1952 to 1997 had a positive
correlation with the cumulated value of household capital
gains on the stock market.*

19. The Importance of stock market - Companies
 Enable company to increase capital by issuing stock to
public.
 Alternative way to finance their business expansion beside apply
financing with financial institution.
 Increase public awareness to the companies.
 A listing on a stock exchange can add value to a company by
giving brand awareness to the public.
 Public are more aware of the products and businesses of the
companies.

20. The Importance of stock market - Companies
 Raise capital through stock market give advantage in
term of low cost of capital.
 Abstains from a number of the intermediation expenses
apparent in the other forms of capital rising.
 Stock market provides the opportunity for companies
to access to a widespread shareholder/ investor
base.
 The company that listed has a wide range of investors,
which may contain of both local and international
investors.

21. The Importance of stock market – Fund Management
Companies (FMC)
 Fund Management Companies is a company provides
management services or investment advices or administrative
services in respect of securities for the purpose of investment.
 The company bring together money from many people in pool
and invest it in stocks, bonds or other assets.
 Example of fund management companies are investment trust
and pension fund company.
Importance
 The stock market allows FMC to allocate the investors’ pool of
fund to diversified stocks offered in stock market.
 Stock market gives advantage for FMC to position investor cash
strategically.
 To be listed in the stock market, companies need to disclose their
financial positions and their business background.
 Give benefit to FMC to analyze the companies before invest the
fund.