What Are the Crucial Functions of Securities Markets?
What Are the Crucial Functions of Securities Markets?
The securities market plays a pivotal role in the economic development of nations. It offers a platform for businesses to raise capital and for investors to earn returns on their investments.
Functions of Securities Markets
1. Capital Formation
Securities markets facilitate capital formation by providing businesses with access to funds. Companies can issue securities, such as stocks and bonds, to raise capital for expansion, innovation, and other investment projects.
| Year | IPO Funding | Total Capital Raised |
|---|---|---|
| 2021 | $173.8 billion | $2.1 trillion |
| 2022 | $158.3 billion | $1.9 trillion |
| 2023 (Est.) | $145.0 billion | $1.7 trillion |
2. Risk Sharing
Securities markets allow investors to share risk by diversifying their portfolios. Investors can spread their investments across different securities, industries, and countries to reduce the impact of any single investment underperforming.
| Investable Asset | Average Annual Return (2010-2023) | Risk Level |
|---|---|---|
| Stocks | 10.0% | High |
| Bonds | 5.0% | Moderate |
| Real Estate | 7.5% | Moderate |
3. Liquidity
Securities markets provide liquidity for investors. Investors can easily buy and sell securities, ensuring they have access to their funds when needed. This liquidity encourages investment and helps maintain market stability.
| Security Type | Average Daily Trading Volume |
|---|---|
| Stocks | 10.4 billion shares |
| Bonds | $1.2 trillion |
| ETFs | 1.4 billion shares |
4. Price Discovery
Securities markets facilitate price discovery. The interaction of buyers and sellers determines the prices of securities, reflecting their true economic value. This price information helps investors make informed investment decisions.
| Year | Average Price-to-Earnings Ratio (P/E) | Average Dividend Yield |
|---|---|---|
| 2021 | 21.3 | 1.5% |
| 2022 | 18.8 | 1.7% |
| 2023 (Est.) | 17.3 | 1.8% |
Success Stories
- In 2022, Google's parent company, Alphabet, raised a record-breaking $2.7 billion through its first-ever bond issuance.
- In 2023, Tesla's stock price surged by over 60% in the first quarter, driven by strong earnings and optimistic market sentiment.
- Since its IPO in 2010, Amazon's market capitalization has grown from $16 billion to over $1.1 trillion, making it one of the most successful companies in history.
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