What Is Involved in Capital Market Development?

In economics, capital refers to resources that businesses use to grow. Usually this takes the form of money that companies can spend on hiring more employees, purchasing more equipment, and increasing production. Businesses usually raise this capital from investors by selling stocks and bonds in capital markets. Governments take a number of regulatory steps in capital market development to build investor confidence through business transparency rules and laws to protect investors' money.

Companies can raise money by selling shares in the business or issuing bonds. Stocks are shares of ownership in the company itself, which investors hope to sell for a higher price or use to collect payments from the business called dividends. Bonds are loans to a company which are repaid with interest. Individuals buy stocks and bonds with the intention of making a profit from the money they invest in a company. This creates a situation in which companies can get additional money to grow, and investors can profit from giving this money to those businesses.

Whenever individuals invest money in a company, they risk losing it. Stock values can go down, or companies can go bankrupt before they repay their bonds. These risks are present in any investment, but investors especially do not want to lose their money to fraud or corruption. Capital market development is meant to build investor confidence that the money will not be lost due to factors that are not business or economic in nature. Building investor confidence is important because it makes investing more likely, which can help businesses grow and larger economies to develop.

One major factor in capital market development are laws to protect investors' money. These can include those that regulate how a company's assets are liquidated and divided among investors. Such laws can reassure individuals who are thinking about investing money in a particular market that its companies will not needlessly, or fraudulently, declare bankruptcy. Such regulations do not prevent investors from losing money if a company fails, but can allow them to get back a percentage of their initial investment, which helps build the legitimacy of the capital market.

Another way in which governments can promote capital market development are through laws concerning business transparency. In order to make informed investment decisions, individuals who are looking to buy a company's stocks or bonds must have reliable information about its finances. This allows them to accurately assess an investment's risk. If investors can trust that the information that companies in a particular market publish about themselves is accurate, then they are more likely to invest in that market.