Impact of Globalization on Capital Market - Example

Globalization and Capital Markets Contents Contents 2 3 Introduction 3 Discussion: 4 Part Emergence of the capital market 4 Part 2: Emergence of the Globalization 7 Part 3: Impact of Globalization on capital market 10 Conclusion 13 References 14 Abstract Since the nineteenth century the flow of the international capital defines the alternative difficulties and the perspectives through which the policy makers have tried to tackle them. The combination of the economic theory and the economic history together will provide important and useful information about the past. We contradict that the theory of capital mobility in the international market is required to be understood within the basic policy framework that is constraining the choice of an open economy in the monetary regime. Introduction Globalization is defined as the process of developing integration and interacting with people, companies and government of various nations. It is mainly determined by the investment, international trade supported by information technology. Globalization generally has effect or influence on the culture, political system, environment, prosperity, economic development, and well being of the people in the society all round the world. Capital market is defined as the financial market that deals with the instruments such as bonds and stocks in the medium and long term market. Capital market plays an important role in functioning of an economy. Capital market includes both primary market and secondary market. In primary market capital market mainly deals with the issue of bonds and stocks that are generally sold to the investors and in secondary market it is responsible for carrying out trade with the existing securities. Globalization in capital market has gained new impetus and it will gain more importance and priority in the near future. The increase in the foreign direct investment and the increasing combination of the financial market is the result of the world trade expansion. The opening and development in the economies of the countries like India and China that have ignited for the development of the globalization in the capital market. Emerging capital market and Globalization analyzes the development of the capital market and the reforms that have taken place in other countries The increasing development in the combination of the global capital market has facilitated the firms to access easily the capital from the outside countries. Discussion: Part 1: Emergence of the capital market Before nineteenth century the geographical importance and scope for conducting international finance was limited as compared to what is going to emerge in the near future. With the expansion in the trade in Europe the financial innovation has developed and spread over the north. The extension of such trade has lead to the development of the markets and the institutions to other centres that are capable of conducting the financial transactions internationally and whose governments are helpful and cooperative to such development. The development in the day to day activities has emerged from the development of the banking system in many countries. The technological and institutional developments within the perspective of finance has used or applied modern communication for transmitting the price and the development of equity and private debt has widened the scope and importance of the government debt market internationally. The increasing importance of the international government bond market and the increasing use of the forward futures contract and derivative securities have lead to the emergence of the capital market. With the emergence of the twentieth century the international capital market has developed enormously (Chisholm, 2003). It has been observed that the advancement in the technology and the growth of the economy in the long run has analyzed and examined the international capital market and its evolution. In the mid of the twentieth century it has marked a remarkable reaction against the domestic and the international markets and particularly against the financial markets. Capital market facilitates the new and the existing businesses to access the cash or the capital. The business mainly utilizes this capital in order to meet the day to day operating expenses and to provide expansion of finance. The benefits of the capital market generally include economic growth and technological innovation. Capital market generally functions as the stock exchanges which deals with debt securities like bonds and the equity securities like stocks. The bond holders are considered as the creditors that lends money to the institutions for a definite period of time in exchange or lieu for the interest payments. The stock holders are mainly known as the owners of the listed companies that are traded publicly and the funds that are derived or obtained from these stock purchases are again reinvested in the firm. Mostly the firm’s issue both bonds and stock and these securities are generally marketed typically and differently that indicates that the original buyer of such securities can sell it to other investors at a future date. The benefits of the capital market such as the stock exchanges mainly deals with the fact that these locations arrange a place where those interested in seeking finance can come into contact with the prospective investors and the lenders. An open capital market generally deprives the country’s government of the ability in targeting its exchange rate and the application of the monetary policy in detection of the economic objectives. The trilemma in the capital market generally originates due to the macroeconomic policy. The inconsistent three policy goals are: Full freedom provided for the capital movement across the cross border, fixation of the exchange rate, identifying an independent monetary policy for the achievement of the domestic objectives. The change in the capital market will reflect and focus on the changing reaction of the fundamental trilemma. Before the year 1919 the major economies of the world have pegged the price of its currency in terms of gold and then maintaining and determining an exchange rate against the currency of the major countries. The financial interest generally dominated the gold standards and the orthodoxy in the financial market where there was no alternative method of providing sound finance. Capital market has played a major role in mobilization of the resources and then distributing and allocating these resources in different productive channels. In this manner it promotes the growth and development of the country. Capital market has established a relationship between the investors and the savers in mobilizing the savings and allocating them in the desired productive channels. The capital market has developed the habit of saving among the people. The capital market has not only focused on developing the general conditions of the economy but has also strived towards the accelerating and smoothening the process or the path for the growth in the economy. The capital market generally aims to decrease and minimize the fluctuations in price and stabilizing the values of the securities and the stock. The capital market has also benefitted the investors by bringing the buyers and the sellers together, advertising the price of the security and safeguarding the interest of the potential investors. Part 2: Emergence of the Globalization In the year 1990, Globalization has become very important in describing the phenomenon of the development of the independent and integrated world economy that emphasizes on the free flow of the goods, capital and services. The capital market has witnessed a global integration just at the beginning of the twentieth century. In the year 2000 the International Monetary Fund has introduced four main parameters of globalization that is the trade and transactions, the movement and migration of the people, the investment and the capital movements, and the sharing of knowledge. The emergence of globalization in capital market has established the global financial system. The financial crisis that occurs unexpectedly and its contagion effects have been spread worldwide. The importance of the monetary policy under the global system has leads to the emergence of the globalization. Globalization is concerned and related to much more than the capital outflows and the trade. The countries are connected together through the medium of travel, communication, services, culture and investment. Globalization has strongly influences everyone from the individual to communities and from the nation to businesses. Therefore the emergence of the globalization has an influenced the capital market strongly. The world is enjoying and reaping the benefits due to the Globalization in the capital market. Globalization has increased the flow of capital in each and every country that has enforced the countries to prepare them in order to tackle and face the crisis. Figure 1: Emergence of Globalization The development and the modification in the internationalization of various financial services that are provided signify the use of financial intermediaries internationally by the investors and the local borrowers. This type of internationalization can be achieved with the help of two important channels. The first channel deals with the increasing presence of the financial intermediaries’ internationally, mainly the foreign banks in case of local markets. The second channel mainly includes the use of the financial intermediaries internationally by the investors and local investors. These types of international financial intermediaries are generally situated outside the country. The example of this channel is related to the trading of the local shares that are listed in the major stock exchanges of the world in the form of depository receipts. Governments are considered as the main agents for Globalization. The other agents for Globalization are borrowers, financial institutions and the investors. Financial institution with the help of internationalization of the financial services acts as a main and important driving factor for financial globalization. The changes in the developing and the developed countries describe the role and the importance of the financial institution as a source of globalization. The emergence of the financial Globalization results in the increase in capital flow between the various nations and which causes the proper organization of the allocation of money. Globalization in finance has developed the standard of living of the people. The Financial Globalization acts as safeguard or acts as a hedge against the national shocks and the establishment of the excellent system for the global allocation of the resources efficiently and effectively. Globalization has lead to the sharing of the risk internationally, decreasing the macroeconomic volatility, and promoting the economic growth (Jones, 2010). The relation between the economic growth and globalization is very critical and complex. The impact and the influence of the Globalization on the financial market can be analyzed by the behaviour or the changes in the financial structure as a reaction to the new conditions. The indicators of the equity return in case of the long run signify more about globalization. The development of Globalization in the financial market has been observed in the recent years. The financial innovation and the advancement in the technologies has played a major role with the emergence of Globalization the cross border financial transaction has become convenient. The derivative products of the financial market have provided assistance to the borrowers and lenders for mitigating and solving their problems. It is observed that the improvement and the development in the efficiency of the capital market in the euro area will provide advantages and benefits to the investors and the borrowers who are capable of accessing the capital market in the euro area and taking the advantage of the breadth, depth and the liquidity. The process of integration and interaction in the global capital market and the financial instruments related to it has played an important role. It can be understood by the fact that the development and the advancement in the information technology have played an important role in increasing the role of the activity related to capital market. This advancement has not only helped in exchanging information rapidly but also provided accuracy in the information that is referred to as reliable in nature (Steger, 2010). Part 3: Impact of Globalization on capital market With the development in the technology and the advancement in the business the stock exchanges are required to update, expand and consolidate their activities. The impact of Globalization can be explained as follows: Rising of capital: The primary objectives of the foreign companies which are listed in the major exchanges are rising of capital. The companies are required to capture the world market with the desire of raising capital and obtaining higher valuation, to increase the base of the shareholder in increasing the company profile that is listed on the international world exchange (Kumar, 2011). Markets are being dominated and influenced by the financial institutions: Globalization is generally accompanied by institutionalization such as the pension funds, insurance companies and the mutual funds. Deregulation of markets: It generally eliminates the control on the foreign exchange, decreasing the tax that is levied on the foreign investors, providing relaxation on the restriction that is imposed on the purchase of the securities mainly domestic by the foreign investors, the issue of the bonds by the foreign borrowers and also the participation of the foreign investment banks in case of underwriting the stocks and bonds in the domestic stock market. Maximizing the return on investment: The increase in investment in transaction carried out across the cross border has been observed more in case of equity. The impact of the Globalization on the capital market can be analyzed by its influence on the future activities of the stock exchange. The main activities include trading, listing and regulation of the stock market. The exchange normally facilitates both the small and the big companies to raise capital and to publicly trade their shares in the market. The exchange provides a comprehensive information services and trading information to the investors and the listed companies. The exchange is responsible for trading in the market and raising the capital and evaluating the applications of the companies that are eager to join the market and monitoring the companies that are listed. Globalization is also responsible for the behaviour of its member firms that deal in the market in order to conduct the operations of the market effectively and efficiently and providing proper protection to its investors. The impact of the Globalization on the capital market can be explained by the functions performed by the capital market. Change or the variation in the traditional role that is played by the capital market: Stock exchanges in the capital market have to compete internationally. For maintaining the cash flow the stock exchanges must extend the services that they provide in order to deliver the value added additionally, connecting into payment and facilities provided in transfer of the stock, and providing a vast range of communication services and online information. Technology: Globalization has helped the stock exchanges in the capital market by adopting continuous investment in technology in order to survive and serve the market users adequately. Trading System: It is assumed to have multiple market places in the future mainly the auction market, cross system, dealer market, or the hybrids in order to satisfy that both the institutional and the retail investors provide different services for fulfilling the trading needs that are specific. Information Disclosure and Listing: Globalization expects that the rules for listing is to be harmonized and the information relating to the disclosure of the standards are required to be uniform across the international global exchanges. Regulation: Globalization expects and assumes that the market must be properly regulated. The investors must be given the first priority. The capacity of protecting the investors properly and inspiring the confidence of the investors are necessary and they hold an integral and important part for competing effectively together with the globalization. Investors: Globalization expects that the market should include both the individual and the institutional investors which signify that the market must assume the market structure in order to include the investors of all sizes. The influence of the strategies adopted by the firm due to the Globalization in the capital market can be assumed by the development in the interaction of the global capital market which has benefitted the firm to access easily and conveniently the capital from the outside countries. The private equity and the venture capital have been widely affected by the Globalization through various foreign acquisitions and the cross border investment. The foreign firm has raised the importance of more debt than the equity in there United States. The main component of the international capital market is the market associated with bond (Gup, 2006). Conclusion Capital market mainly refers to the market that deals with the long term funds for the purpose of investment. Capital market is considered as the main and the important force towards the creation of wealth and the growth and development in many countries... The regulators of the financial institutions and the investors keep vigilance towards the growth and development in the global capital market. Capital market plays an important and a complex role in the formation of capital. The formation of capital is very important for the development in the economy. It plays a wide role that includes mobilization of saving and formation of capital, providing continuous and ready market, providing technical assistance and facilitating easy liquidity in the market. Globalization provides a framework of institutions, legal agreements, that has facilitated the international flow of the financial capital that can be used for trade financing and investment. While globalization is marching towards providing stability the government is required to deal with the different regional needs. The policy makers also face problems and challenges in formulating the sustainable macroeconomic policies during the analysis of the sensitivity of the market. Therefore, it can be concluded that the capital market and the globalization has been developing and the international capital market have widened substantially and also the volume of transaction in the capital market have developed remarkably and significantly. The liberalization in the capital market and the development of the various financial instruments has lead to the flow of capital internationally thus leading to the expansion and development of the international financial market and increasing its efficiency. References Chisholm, A.M., 2003. An Introduction to Capital Markets: Products, Strategies, Participants. Canada: John Wiley & Sons. Gup, B.E., 2006. Capital Markets, Globalization, and Economic Development. NewYork: Springer Science & Business Media. Jones, A., 2010. Globalization: Key Thinkers. Cambridge: Polity. Kumar, B., 2011. Capital Market. New Delhi: Excel Books India. Steger, M., 2010. Globalization. Canada: Sterling Publishing Company, Inc. Read More