February 8, 2016

The death of stock markets

What is the main function of a stock market? It is to raise capital for a new business or investment opportunity, if one were to answer the question in a conventional sort of way. Stock markets are designed to facilitate capital raisings for investments projects. They allow savers to invest, and provide existing investors with the ability to liquidate their investments when circumstances require.

Above is the traditional/ conventional definition of a stock market.

Now the reality... The nature of stock markets has been changed by alternative source of risk capital: the high cost of a stock market listing, particularly increasing compliance costs; increased public disclosure and scrutiny of activities, including management remuneration; and a shift to different forms of business ownership, such as private equity.

So entrepreneurs and businesses are now more likely to raise capital from private equity and venture capital firms than from the stock market.

In the Indian context, this becomes clear from the fact that the total number of public offerings of shares (both IPOs and FPOs) has fallen dramatically over the years. But the amount of money raised through the private equity/venture capital route as well as the non-convertible debentures route has been steadily growing.

The stock market only comes into the picture when these initial investors want to offload their shares in the firm.

So nowadays the stock market is not a way of putting money into companies, but a means of taking it out.

Source: https://www.valueresearchonline.com/story/h2_storyview.asp?str=30190

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