Issue medium and long-term government bonds to raise capital. In addition, government agencies also issue government-guaranteed bonds to borrow money. In addition, there are also bonds issued by local governments to finance local investment spending needs.
2. Enterprises, including financial enterprises (including financial intermediaries such as commercial banks, insurance companies, finance companies, etc.) and non-financial enterprises (including trading firms, joint stock companies). Enterprises can issue shares, corporate bonds, guarantees and list these instruments on the centralized market.
3. Foreign companies can also issue and list their securities on the market of a host country. Some companies even list their securities on multiple stock exchanges in different countries at the same time.
c) Organizations providing financial services in the capital market
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Organizations providing financial services in the capital market include:
First, centralized stock exchanges. Centralized exchanges organize securities trading for individual and institutional investors. Participation in this activity also involves securities brokerage activities of securities companies or independent brokers who are members of the stock exchange. In order to improve the efficiency of securities trading, exchanges introduce standardized securities trading rules to promote rapid transaction execution and reduce transaction costs.
Second, securities companies, also known as investment banks. Securities companies promote the issuance of securities by companies, to create commodities for trading on the market, and also act as market makers for various types of securities to provide liquidity for securities. Securities companies also carry out investment consulting, securities valuation and portfolio management activities for customers. Activities
This activity provides professional asset valuation services, helping the capital market operate more efficiently, preventing excessive price fluctuations in the capital market.
Third, credit rating agencies: these agencies will provide assessments of the risk level of securities issuing companies for investors to refer to when making investment decisions. Credit rating agencies must comply with professional standards when providing assessments of the risk level of the companies they rate. Credit ratings from rating agencies can help customers save costs in searching for and analyzing information about the business situation.
Fourth, Depository Center, Payment Bank: These organizations provide securities depository and payment services, helping transactions to be carried out quickly and effectively.
Fifth, auditing firms: These firms will review the financial statements of public companies to provide comments on the accuracy of the financial statements to ensure that investors have accurate information about the company before making investment decisions.
1.1.4. Capital market structure
Based on different criteria, capital markets can be classified into sub-markets.
Firstly, based on the characteristics of the securities traded, the capital market can be divided into the debt market and the equity market (stocks). The debt market is the market for trading and buying and selling debt instruments. The essence of debt instruments is contractual loan agreements in which the issuer is the borrower in the form of periodic repayment of both principal and interest. The lender is not responsible for the results of the borrower's use of capital and in all cases, the borrower is responsible for repayment according to the commitments recorded on those debt instruments. Debt instruments have a specified term. In the capital market, typical debt instruments are government bonds and corporate bonds. Unlike the debt market, the equity market is where stocks are bought and sold.
A certificate or certificate of capital contribution by shareholders to a joint stock company. A share confirms the rights and interests of shareholders in the income and assets of a joint stock company. Shareholders are the owners of the company and are responsible for the company's performance within the scope of their capital contribution. Unlike most bonds, which have a fixed maturity date, shares do not have a fixed term and the company is not obliged to buy back the shares from the shareholders. Shareholders can only get their money back by selling the shares on the market to recover capital or when the company dissolves or ceases operations.
Second, based on the characteristics of issuance and trading of financial instruments, the capital market can be divided into primary market and secondary market. The primary market is the market in which financial instruments are bought and sold for the first time. This is often considered as the market that creates goods for later trading in the secondary market. The primary market is the issuance market. Issuers will only mobilize capital once through the offering of securities in the primary market. The secondary market is where financial instruments that have been issued in the primary market are traded. The purchase and sale of securities in the secondary market does not change the capital of the issuing organization but is essentially just the transfer of ownership of financial instruments. The secondary market helps determine prices and provides liquidity for financial instruments. The activities of the primary market and the secondary market have the effect of enhancing, supplementing, and promoting mutual activities between the two types of markets.
Third, based on the characteristics of the transaction organization, the capital market can be divided into the Exchange and the decentralized market (over-the-counter market - OTC). At the Stock Exchange, transactions are carried out at a centralized location called the exchange. Investors either directly or through brokers carry out securities transactions on this exchange. Securities must satisfy certain conditions on scale and business performance to be traded on the Exchange and are called listed securities. Unlike the Exchange, the decentralized market does not have a centralized trading location, but transactions on the decentralized market
takes place in many places, mainly at the transaction counters of banks and securities companies. The basic difference between the Exchange and the decentralized market is shown in a number of aspects such as: there is no centralized trading location between the buyer and the seller, the securities traded on the decentralized market mostly do not meet the listing standards on the exchange or because the companies decide not to list on the Exchange, the price setting mechanism is mainly through the agreement mechanism, unlike the auction mechanism on the Exchange.
1.1.5 Capital market instruments
Capital market instruments include debt and equity instruments with maturities greater than one year or indefinite. Capital market instruments typically involve higher levels of risk and greater price volatility than money market instruments.
First is stocks. Stocks are the most well-known financial instruments in the capital market. They are certificates or book entries that prove the capital contribution and legal interests of the stockholders in the assets and remaining income of a joint stock company. There can be many different types of stocks such as common stocks, preferred stocks, registered stocks, and bearer stocks. Holding stocks brings income to investors in the form of dividends, but more importantly, the expectation of gaining price differences from holding stocks. Stock prices fluctuate in the market depending on the supply and demand of stocks, and investors' expectations about the future operations of the joint stock company.
Second, mortgage loans: these are loans to individuals or real estate companies and use the real estate itself as collateral. To increase the liquidity of real estate, these loans can be designed into real estate securities with small denominations that are convenient for trading. The income from real estate and the value of the real estate are the guarantees for real estate securities. Loans
Mortgage loans and real estate securities occupy an important position in the housing finance market in many countries around the world.
Third, corporate bonds: These are standardized contractual debt agreements issued by companies to borrow capital in the financial market. Corporate bonds have many different maturities and have some special attributes such as callable bonds, convertible bonds to provide diverse choices for investors. Unlike government bonds, companies often pay bond interest twice a year to increase the attractiveness of bonds.
Fourth, Government and Government agency bonds: these are debt instruments issued by the government or guaranteed by the government for government agencies to issue loans in the market. These types of bonds have high safety, high liquidity and are often used as benchmark bonds to reflect prices and interest rates in the capital market.
1.1.6 The Government's regulatory role in the capital market
The operation of the capital market is complex in many different aspects. In terms of market organization, the capital market can be organized into a centralized exchange or a spot market. In terms of the process of issuing and trading securities, it forms the primary and secondary capital markets. In terms of instruments in the capital market, in addition to basic instruments such as stocks, corporate bonds, government bonds, there are also diverse derivative securities instruments such as warrants, call rights, etc. In terms of participants in the capital market, including the government and government agencies, individual investors, domestic and foreign institutional investors, financial intermediaries providing services in the market such as securities companies, credit rating companies, investment funds and government agencies performing the function of operating and supervising the operation of the capital market.
Due to the complexity in the functions and operations of the capital market, there are a series of problems that market participants themselves cannot solve.
cannot be effectively resolved, requiring government intervention for the market to function properly. These issues can be summarized as follows:
First , information asymmetry. This situation occurs when market participants do not have sufficient information to make appropriate decisions and cause damage to their interests. Serious information asymmetry will hinder the efficient operation and development of the capital market. Information asymmetry leads to two problems in the capital market.
First is the problem of adverse selection. Adverse selection occurs when buyers do not have enough information, leading to the purchase of poor quality goods that do not meet the buyer's needs. For example, an investor may buy a low-quality stock or corporate bond at a high price, then lose money on the investment.
Next is the problem of moral hazard, also known as the psychology of dependence. Originating from the characteristic of separation between ownership and management rights in joint stock companies on the stock market, the board of directors of the company can act for the benefit of the board of directors, causing damage to the interests of shareholders (the board of directors can hide or reduce the company's profits). Moral hazard also occurs in the debt market. This is due to the asymmetry of benefits, borrowers are motivated to participate in overly risky activities in the style of "winner takes all, loser takes all". That is, if the investment is effective, the borrower will enjoy most of the results, but if there is a risk, the lender will bear most of the loss.
Adverse selection and moral hazard negatively affect the functioning and development of capital markets. To limit these situations, governments can regulate by requiring companies to disclose information, requiring compliance with auditing standards, and requiring restrictions on borrowing [28].
Second , speculation and fraudulent behavior in the market. Speculation is often associated with investment activities in the stock market. Speculative activities of institutional and individual investors lead to price bubbles.
financial assets, followed by financial crises, destabilizing the economy. The stock market also encourages fraudulent behavior due to conflicts of interest such as insider trading, false information disclosure, and market price manipulation [80]. To prevent speculation and risk concentration, prudential regulations are needed to regulate the activities of financial intermediaries participating in capital market investments such as commercial banks, securities companies, investment funds, insurance companies, etc.
Third, the issue of investor protection. Regulations on investor protection will help companies expand their ability to raise capital. Companies can raise capital from two sources: debt or new shares. Countries with financial systems that provide companies with favorable conditions to raise capital from outside will have higher stock prices and larger stock markets. Better investor protection will allow investors to provide capital on more favorable terms, which helps reduce the cost of raising capital for companies. La Porta et al., Djankov et al. found evidence that countries with better investor protection have a strong impact on the size and development of capital markets [96], [109]. The level of investor protection is reflected in regulations on information disclosure, the liability of directors, and the ease with which shareholders can sue directors in court. Measures to improve investor protection require better disclosure requirements, increased transparency in corporate operations, and clear provisions on shareholders' rights against managerial misconduct [76],[77],[78].
Thus, government regulation of capital market operations can be classified into the following four contents:
1. Regulations on market organization and market participants
2. Regulations on securities issuance
3. Transaction regulations
4. Regulations on information disclosure and market surveillance.
In addition, there are other legal foundation regulations that will be analyzed in a separate section on capital market development conditions.
1.2 Basic issues of capital market development
1.2.1 Concept of capital market development
As analyzed in section 1.1.2, the relationship between financial market development and economic development has been proven in empirical studies and is especially influential in developing countries. Therefore, developing financial markets, including capital markets, is an activity with a solid scientific basis. An issue here is how strategies and measures for capital market development should be implemented.
In developed countries, the development sequence of financial markets occurs as follows: the development of commercial banks occurs first, followed by the primary market for government debt instruments, the primary market for stocks, followed by various secondary markets, and finally derivatives markets. This development process is considered to occur naturally according to the development sequence of financial markets in countries. The fundamental disadvantage of this process is that it does not allow for mutual support between the market and financial institutions in the development process due to the limitations of the historical development sequence.
Another approach to financial market development is that development policies need to be based on the functions and operations of financial markets for planning and implementation. Capital market development, in addition to improving the efficiency of resource mobilization, also allows for other functions such as risk sharing and management, promoting international integration, as well as improving the efficiency of management and supervision by regulatory agencies. Capital market development is to promote and enhance the functions and operations of capital markets in the economy [92]. ADB's capital market capacity building programs for developing countries in Asia also share this goal. That is, capital market development aims to promote a diverse, competitive market to enhance the confidence of domestic and foreign investors,