Capital markets and financial services are inclusive of each other. A capital market is a place where people deal in financial services such as stocks, bonds, shares, currencies and other financial assets. Both the stock and bond markets are included in capital markets.
Today the capital market is a very crucial place for buyers and sellers of financial assets. It allows common people to make more profit to do more savings for their future. The future of the capital market and financial services is bright but it still has some problems that need to be solved over time. One can better peep into the problems of capital markets with the financial services course to come up with potential solutions that can bring the necessary changes.
Read on to understand the common flaws in the system of capital markets and understand the potential solutions to increase business and market efficiency.
What are Capital Markets?
Capital market is an area of Financial Market where buyers and sellers come together to deal in various financial assets such as stocks, bonds, government securities, currencies, etc. These are generally traded between big investors, businesses, governments, institutions and individuals.
People successfully dealing in capital markets have the eye to identify and allocate assets to their best abilities. There are many notable people that participate in the transaction in the capital market such as analysts, big companies, sell-side institutions and so on.
Capital Market Problems
In the present-day economy, capital markets are indeed very important. They generate income and profit for money individuals and organisations but it also has a negative side. Capital markets can fuel misinformation, materialism and economic slump. Generally influential investors and businesses perpetuate such consequences which can greatly affect the market situation.
Here are the two major problems that capital markets have:
Asymmetric information in the capital market is a situation where a buyer or a seller has an upper hand over its contemporaries. This is because the buyer or the seller knows more about the particular investment including its historical background and present which helps them to make better predictions about the investment object.
As a result, the investor in this particular investment can make more informed and effective decisions when compared to others. This can be misused by employees of any organisation when they have access to sensitive proprietary information. Such employees or investors can misuse confidential information in the capital market to gain unethical profits.
Asymmetric information is very unhealthy for the market balance and disturbs the parity of the capital market. As is evident from the 2007-2008 mortgage crisis, in extreme situations asymmetric information can also lead to market failure.
The principal-agent problem is another major issue in the capital markets. These are the conflicts between the owner of an asset and its representative who deals in the capital market on their behalf. Some major types of principal-agent problems in capital markets are as follows:
- The problems between the shareholders of a company and the management teams.
- The conflict between major Financial institutions and the rating departments.
- The issues between lawyers and clients.
These are all examples of principal-agent problems which are common in MNCs. However, a company can handle these problems in various ways such as by realigning and redesigning the priorities of the company, improving the system of incentives, enhancing the flow of information throughout the organisation and so on.
Solutions to Capital Markets' Problems
There is still not any set of clearly defined solutions to these problems but many organisations have tried and tested some solutions which they can incorporate into their system. The following are some of the ways in which capital market problems can be better dealt with:
Board of directors
Many companies have built a bowl of directors who can strictly look after the management of the company so that the capital market problems can be dealt with. The constant oversight over the management will not allow them to be a part of any misrepresentation shareholders' interest will be properly represented and ensured.
However, the solution also has a disadvantage. The major drawback is that some of the members of the board of directors can also be biased. Such a selected board of members can be the result of manipulation which will not solve the said problem.
Stock ownership means offering some stocks to the higher-level employees of an organisation. This is a means of providing incentives to the employees by the company. This helps to motivate employees to perform to their best abilities and tend to manage their work effectively.
This system works in favour of the investors, businesses and employees. The drawback of the system is that CEOs may start to avoid taking financial risks in order to protect the finances of the firm and their stock values to protect their personal interest.
Punishments for misrepresentation
Apart from solutions like incentives and motivation, some companies also indulge in the process of punishing employees for misrepresentation. This is a negative approach towards reducing misrepresentation in the organisation but has proven to be effective.
On the contrary, it can lower the morale of employees and managers can refrain from taking major decisions that involve a degree of risk.
Monitoring company moves
It is possible for private equity investors to purchase out companies from public exchanges even if they are established and traded in a public manner. They can closely examine and monitor the capital markets to predict their next moves. It is very important for the management and stakeholders of the company to review and enhance the internal process and objectives of the organisation.
This helps investors to properly analyse the market and make decisions regarding going public again. The key to this step is to closely monitor and analyse the market and the company processes.
Capital markets and financial services can lose their balance and become turbulent if such problems and the system are not solved. Capital markets are a great platform for investors, organisations and institutions to make money and show their ability to make informed investments. If you want to inculcate knowledge about the capital market then the IIM Lucknow course can be your go-to pick.
Capital markets have their own share of problems but indeed are an effective place for generating profits by investing effectively. If you want to become a good investor and learn the tricks and tactics of capital market and financial services, sign up for the Financial Services and Capital Markets course IIM Lucknow by Imarticus. It is an advanced level course which is perfect for you to enhance your trading abilities.