Financial Management (ePub)

Seminar paper from the year 2010 in the subject Business economics - Investment and Finance, grade: 1.0, University of Sunderland, language: English, abstract: The role and importance of capital markets and EMH
Crisp plc has to attract investments from capital markets.
A capital market is simply any market where a government or a company (usually a
corporation) can raise money (capital) to fund their operations and long term (periods longer
than a year) investment.[1] Usual, short-term funds can be founded on other markets (e.g., the
money market). The capital market consists of the stock market (equity securities) and the bond
market (debt). Bonds and stocks are two ways to generate capital of any company.
New issues of bonds and stocks are placed on primary capital markets by way of
underwriting among investors. All money, received during underwriting, goes to company (Crisp
plc) for its investment purposes.
And placed bonds and stocks are sold and bought among other investors or traders in the
secondary capital markets (a securities exchange, over-the-counter, or elsewhere). The prices of
securities (both bonds and stocks) on secondary markets are reflected «real» price of company.
It is good benchmark for primary placements of additional issues of bonds and/or stocks (further
extension of the company).
Crisp plc is going to issue bond or stocks. It means that it attract money from primary
markets. Here very important thing is true price of bonds and/or stocks of Crisp plc, i.e. price has
to be interesting for investors and allows to attract maximum of money.
As stated above, prices of securities on secondary markets are reflected «real» price of
company from point of view of investors. Here the efficient-market hypothesis (EMH) plays
very important role, because it is the tool of securities pricing of off-site investors (which are
outside of the company).
According to the efficient-market hypothesis (EMH), which was developed by Professor
Eugene Fama, financial markets are «informationally efficient».[2] It means that prices on traded
assets are «real» and already reflect all known information. Prices change to reflect new
information (for example, new investment program of the company). Consequently, it is
impossible to consistently outperform the market by using any information that the market
already knows. Information or news in the EMH is defined as anything that may affect prices
that is unknowable in the present and thus appears randomly in the future.