Stock Market Crucial for Ethiopian Economy

Stock market essential for growing economy of Ethiopia

Written BY DR.SREEPADA HEGDE  –  Madawalabu University

European Economic Review, a pioneering work from Atje and Jovanovic reviewed that stock market development is strongly correlated with growth rates of real GDP per capita. More importantly, they found that stock market liquidity predict the future growth rate of economy. American Economic Review article by Levine and Zervos examined stock market‐growth nexus and exhibited positive casual correlation between stock market development and economic activity.

At the close of 2012, the size of the world stock market (total market capitalization ) was about US$55 trillion._By country, the largest market was the United States (about 34%), followed by Japan (about 6%) and the United Kingdom (about 6%). This went up more in 2013.

A clear government policy and strategy for the development of a capital market would help in bringing confidence among the business community and the public at large. In this regard, the business community, through the chamber system, needs to continuously dialogue with the Government of Ethiopia to bring about this missing policy and strategy for the development of a capital market in Ethiopia.

Sydney Ludvigson is an economist and Charles Steindel a senior vice president at the Federal Reserve Bank of New York conducted a study on How Important Is the Stock Market Effect on Consumption reported in America, The second half of the 1990s has seen substantial changes in the wealth of American households, primarily owing to movements in the stock market. From mid-1994 to mid- 1997, the aggregate value of household sector equity holdings (including those owned by nonprofits, mutual funds, and pensions and other fiduciaries) roughly doubled, for a dollar gain of about $5.2 trillion.

Since then, stock market values on balance have continued to rise, but there have been massive fluctuations within a wide band; the dollar value of movements within the band–from the low in October 1997 to the recent highs–has been greater than $3.0 trillion. These enormous swings in wealth no doubt have major implications for consumer spending. For this reason, the ability to measure the implications of the swings–that is, to determine their “wealth effect” on consumer resources–has grown in importance with the changing economic environment.

In the aggregate, household wealth accumulation reflects two factors: saving from current income and changes in the valuation of previously owned wealth. The second factor completely dominates changes in aggregate wealth in the short and intermediate terms. In turn, changes in the valuation of existing assets are dominated by fluctuations in the stock market.

Jetu Edosa Chewaka of Gondar School of Law commented on the Legal Aspects of Stock Market Development in Ethiopia noticed that country lacks the institutional and legal frameworks that regulate the market for stock exchange, and in effect, the current stock trading activity may grow into a largely unregulated space in which everyone speculates and plays for short-term gains. Introducing stock market amidst the proliferation of companies in Ethiopia can thus benefit the economy. It is natural to expect that both companies under formation and investors in existing companies sell and transfer their shares to third parties giving rise to the availability of tradable shares in the market.

Mizan Law Reviewed in 2014, it is widely believed that stock markets have the potential to be powerful engines of economic growth in developing nations such as Ethiopia. John Fagan in Columbia Journal of Asian Law noticed that efficient stock market provides the public with investment opportunities and mobilizes savings, as well as international capital, for productive corporate financing.

Trade in stock markets means the transfer for money of a stock from a seller to a buyer. This requires these two parties to agree on a price. Equities (Stocks or shares) confer an ownership interest in a particular company. Participants in the stock market range from small individual stock investors to larger traders_investors, who can be based anywhere in the world, and may include banks, insurance companies or pension funds, and hedges funds. Their buy or sell orders may be executed on their behalf by a stock exchange trader.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This method is used in some stock exchanges and commodity exchanges, and involves traders entering oral bids and offers simultaneously. An example of such an exchange is the New York Stock Exchanges. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically by traders.

A potential buyer_bids_a specific price for a stock, and a potential seller_asks_a specific price for the same stock. Buying or selling_at market_means you will accept any_ask price or bid price for the stock, respectively. When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a market place (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

Market participants include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge funds, and also publicly traded corporations trading in their own shares. Some studies have suggested that institutional investors and corporations trading in their own shares generally receive higher risk-adjusted returns than retail investors

A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, usually with long family histories to particular corporations. Over time, markets have become more “institutionalized”; buyers and sellers are largely institutions (e.g.,pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the institutional investors has brought with it some improvements in market operations.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Veona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens.

The Dutch East India Company (founded in 1602) was the first joint-stock company to get a fixed capital stock and as a result, continuous trade in company stock occurred on the Amsterdam Exchange. Soon thereafter, a lively trade in various derivatives, among which options emerged on the Amsterdam market. Dutch traders also pioneered short-selling – a practice which was banned by the Dutch authorities as early as 1610.

There are now stock markets in virtually every developed and most developing economies, with the world’s largest markets being in the United States, United Kingdom, Japan, India, Pakistan, China, Canada, Germany , France,_South Korea and the Netherlands. One of the many things people always want to know about the stock market is, “How do I make money by investing?” There are many different approaches; two basic methods are classified by either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements , business trends, general economic conditions, etc.

A request to the Government of Ethiopia, The need for capital market development has, however been continually discussed by various groups/stakeholders and academics in Ethiopia.Only the need to establish a stock market is left to Government of Ethiopia because Ethiopia is the gate way for African Countries, Ethiopians are Strong enough in all respect and a positive approach will strengthen the Ethiopian Economy. Thus, Stock market will pave the way for strengthening the Ethiopian Economy.

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