Stock markets

Stock markets

Stock markets are part of the capital markets (maturity in excess of 1 year), as are the bond and mortgage markets. The mortgage market remains largely domestic and is not discussed here. Stocks purchased on these markets help diversify investor portfolios. Portfolio risk is thereby reduced, provided the correlation between stock returns of different economies is lower than that of a single country. Institutional investors and pension fund managers (if permitted), managing large funds, are likewise attracted to foreign shares. The growth of global unit trusts or mutual funds has also increased the demand for foreign equity. Fund managers select and manage the stocks for the trust or fund, using their (supposedly) superior information sets compared to the majority of individuals.and transactions costs are lower than they would be with an independent set of investments. The euro equities market has grown quite rapidly in recent years, and caters to firms issuing stocks for sale in foreign markets. Investment banks (many headquartered in New York) underwrite the issues, which, in turn, are purchased by institutional investors around the world. Secondary markets for these foreign issues normally emerge.
Firms issue equity on foreign stock markets for several reasons.
1To increase their access to funds without oversupplying the home market, which would depress the share price. Foreign investors, with a different information set to home investors, may also demand the stock more.
2 To enhance the global reputation of the firm.
3 To take advantage of regulatory differences.
4 To widen share ownership and so reduce the possibility of hostile takeovers.
5 To ensure that their shares can be traded almost continuously, on a 24-hour basis.
6 Funds raised in foreign currencies can be used to fund foreign branches or subsidiaries and dividends will be paid in the currency, thereby reducing the currency exposure of a multinational enterprise.

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