Equity Capital Market

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The beginnings of stock companies

It is generally believed that stock companies originated with the Dutch East India
Company, which was founded in the 17th century.

Dutch East India Company

Funds

Stocks Funds

Investors

Stock

Investors

(1) When they generated profit by safely bringing

products in from Asia and exchanging them for money:
Investors may receive dividends
based on invested capital

spices / cotton / silk

(2) When a merchant vessel was shipwrecked
causing tremendous losses:
Investors do not get invested capital
back but do not incur losses greater
than the capital invested

(Source) Created by Nomura Securities, Investment Research & Investor Services Dept.

Mechanism for issuing stock

A stock company raises funds through the primary market.
Primary market
(Fundraising by firms)

Money

Money

Stock

Stock
company
Raises funds by
issuing stock

Stock

Securities
company
Underwriting (undertaking/secondary sale)

Selling (handling floatation/secondary sale)

Investors

Buy stock

Mechanism for trading stocks

Investors buy and sell stocks on a securities exchange.
Secondary market
(Circulation among investors)

Investors

Investors

Buy and sell shares

Buy and sell shares

Stock
Exchange

Order

Order

Securities company

Brokerage

Order

Order

Securities company
Brokerage

Role of the stock market

Stocks play an important role in modern society.

1. Through stock, which is limited liability investment,

investors bear risk to provide capital to firms. Firms use
that capital to roll out economic activity without guaranteed
results. Dynamism works to create new value.
Stock company

Funds

2. Nearly all the conveniences around us (cars, home

appliances, cell phones, home delivery service, etc.) are
manufactured and operated by stock companies.

Stocks
3. As businesses succeed, they also fail. If a business
fails and the company goes bankrupt, invested funds may
not be returned to investors; but if it succeeds, they can
expect just return.

Investors

4. Investors can choose from a variety of credible

businesses that they want to invest in. Stock can be called
the receptacles for reducing risk for investors.

Direct and indirect finance

Features of indirect finance

Features of direct finance

Securities companies intermediate between

investors and firms
Investors receive information and advice

Banks determine whether to lend money

Banks are responsible for managing
credit risk

Investors determine their investments

Banks assume risk

Investors assume risk

Banks loan funds with depositors and firms

Depositors provide funds to banks

[Conceptual diagram of indirect finance]

Interest &
dividends

Government and
firms

Mainly banks

Investment

Securities market

Interest

Investors

Loans

Government and
firms

Interest

Financial institutions

Depositors

Deposits

[Conceptual diagram of direct finance]

Mainly securities companies

(Note) Even with indirect finance, depositors who ultimately furnish funds are not completely risk-free.

Shareholder rights and principles of stocks

Rights of shareholders
(1) Controlling interest of a
company

A general shareholders meeting is a firms highest

decision-making body. Authority to make management
decisions is proportionate to equity.

(2) Claim to dividends of

surplus

The right to receive dividends on a companys profit. The

owner of a company is a shareholder-investor and a
companys profit belongs to shareholders.

(3) Ownership of assets held

by a company

When a company dissolves, shareholders acquire the

companys net assets remaining after dissolution based
on the number of shares they have.

Principles of stocks
(1) Principle of limited liability

(2) Principle of free transfer

Even if a company goes bankrupt, the liability of

shareholders is limited to the value invested by each.
Shareholders can freely transfer the shares they own
at any time (excluding shares with restrictions on
transfer)
(Note) Please be aware that there are classified stocks with conditions and restrictions on the above rights and principles