NAME: EVANS MUIRURI MWANGI

REGISTRATION NUMBER:1027447

COURSE: LAW

COURSE TITLE: CAPITAL MARKETS LAW

COURSE CODE: CLS 304

COURSE INSTRUCTOR: DR ANDY COLIE MATATA

DATE OF SUBMISSION: 17/06/2019

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 TABLE OF CONTENT

INTRODUCTION TO CAPITAL MARKETS………………………………………….2

ROLE OF CAPITAL MARKETS TO THE ECONOMY……………………………....3

OTHER FACTOR THAT CONTRIBUTES TO GROWTH OF THE ECONOMY……4

CONCLUSION………………………………………………………………………….5

REFERENCE……………………………………………………………………………6

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QUESTION: WHAT IS THE ROLE OF CAPITAL MARKETS IN ECONOMIC
GROWTH?

Capital Market refers to where funds are transferred from people who have excess funds to the
people who have shortages of funds. Capital market is a market for financial investments that are
direct or indirect to the claims of capital and it is also one of the financial markets components.
As shown in the diagram below

The following influence capital markets and its growth:1

 level of savings in the household sector

 taxation levels
 health of economy
 corporate performance
 industrial trends and
 common patterns of living.

The contact between agents with deficit of money and the ones with monetary surplus can take
place in a direct way (direct financing), but also by the means of any financial intermediation
form (indirect financing), situation in which specific operators realize the connection between
the real economy and the financial market. In this case, the financial intermediaries could be
banks, investment funds, pension funds, insurance companies or other non-bank financial
institutions.2

1
Capital markets notes
2
https://www.proshareng.com/news/Capital%20Market/The-Role-of-the-Capital-Market-in-the-Economy/28259

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The following are among the major objectives of capital markets:

 To mobilize resources for investments.

 To facilitate buying and selling of securities.
 To facilitate the process of efficient price discovery.
 To facilitate settlement of transactions in accordance with the predetermined time
schedules.

These objectives are enable the capital markets to play a key role in the growth of the economy

ROLE OF CAPITAL MARKETS TO THE ECONOMY

Capital markets contributes to the growth of an economy through the following ways:

 Creation of job opportunity.

 Production in form of capital investment.
 Capital structure raises productive efficiency of labour.
 Creation of stability in the value of stock market.

Capital markets through creation of job opportunity enable the people to improve their standards
of living as they are earning incomes, therefore there will be high rate of consumption leading to
more goods being purchased hence improving the economy.

Production in form of capital investment when increased allows for more research and
development in the capital structure. This expanding capital structure raises the productive
efficiency of labour. As labour becomes more efficient, more goods are produced (higher gross
domestic product) and the economy grow.3

Capital structure raises productive efficiency of labour in the sense that more people will be
working as a force of labour. Capital structure refers to how a firm finances its overall operations
and growth by using different sources of funds. Debt comes in the form of bond issues or long-
term notes payable. Short-term debt such as working capital requirements is also considered to
be part of the capital structure.4 In respect to this when have the expanding capital structure

3
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=2ahUKEwiwpcXp_e7iAhUltnEK
HfSODncQFjABegQICxAF&url=https%3A%2F%2Fwww
4
https://www.investopedia.com/terms/c/capitalstructure.asp

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raises the productive efficiency of labor. As labor becomes more efficient, more goods are
produced (higher gross domestic product) and the economy grows.

OTHER FACTOR THAT CONTRIBUTE TO GROWTH OF THE ECONOMY

Creation of stability in the value stock market is a major player in the development of the
economy as it can direct the growth up and at the same time it can direct the growth slowly.
Stock markets are one of the factors that affect the economy, but there are others as well. Interest
rates affect the economy because low rates means lower borrowing costs. Consumer spending
and business investment rise up, which increases the economic growth. Falling interest rates can
reduce economic growth. Stock prices can affect business investments.5 Businesses are likely to
make capital investments when they feel that these investments will lead to rising market values,
such as during rising or bull markets. Management has more operational flexibility if sustained
stock price increases lead to increased consumer spending.6 Merger and acquisition activity tends
to increase during bull markets because companies can use stock as currency. Initial public
offerings increase as new companies take advantage of market optimism to raise capital.7 This
increases the business investment activity hence rising the economy. The following are the role
of stock exchange as a market for security:

 Transfer of shares as it facilitate the transfer of shares from seller to buyer.

 It enables individual, government and organization to make profit by buying shares at
low prices and selling them at a higher price.
 It assist companies to raise capital to fund the expansion project by creating an
environment through which such companies issues new shares to members of the public
for example (I.P.O) Initial Public Offering.
 It enables investors to buy shares for investment purposes in order to earn dividends
 Stock exchange market provide investors with opportunities to channel their excess funds
to buy shares, thus promoting saving culture.

5
https://finance.zacks.com/stock-stocks-affect-economy-2233.html
6
https://finance.zacks.com/stock-stocks-affect-economy-2233.html
7
https://finance.zacks.com/stock-stocks-affect-economy-2233.html

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 CONCLUSION

Indeed, capital markets derive its powers and mandate from the financial markets. As we have
seen, through capital markets we are able to to see how funds are transferred from the people
who have excess to the people who need them. We have also seen that capital markets is a
broader aspect of financial markets and how it leads to development of the economy. Capital
market plays an extremely important role in promoting and sustaining the growth of an economy.
It is an important and efficient conduit to channel and mobilize funds to enterprises, both private
and government. It provides an effective source of investment in the economy. It plays a critical
role in mobilizing savings for investment in productive assets, with a view to enhancing a
country‘s long-term growth prospects, and thus acts as a major catalyst in transforming the
economy into a more efficient, innovative and competitive marketplace within the global arena.
Stock exchange market and its capabilities together with the roles it plays towards economic
developments.

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 REFERENCE

http://www.polk.k12.ga.us/userfiles/588/Classes/1016/factorseconomicgrowth%201.ppt

http://www.virtusinterpress.org/IMG/pdf/10-22495_jgr_v4_i1_c1_p6.pdf

https://www.investopedia.com/terms/c/capitalstructure.asp

https://finance.zacks.com/stock-stocks-affect-economy-2233.html

Form 2 inventor book of business studies