COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS
3rd YEAR ECONOMICS STUDENTS
YEAR 2015 E.C
COURSE TITLE: FINANCIAL ECONOMICS
COURSE CODE: ECON3012
TITLE:ECONOMIC IMPACT OF ESTABLISHING CAPITAL MARKET (PARTICULARLY
IN DEVELOPING COUNTRIES LIKE ETHIOPIA).

GROUP ASSIGNMENT
GROUP MEMBERS

NAME ID NO
1.MOHAMMED JEMAL.........................................................................SSR/0696/13
2.DESTAW DENEKEW..........................................................................SSR/0311/13
3.MENUR MOHAMED............................................................................SSR/0646/13
4.YASMIN ENDRIS................................................................................SSR/0990/13
5.SEBLE WENDEMAGEGN..................................................................SSR/0810/13
6.MEKBIB MESFIN.................................................................................SSAD/215/13
7.CHILOT MULACHEW............................................................................SSAD/088/13
8.YECHALE KASSA.................................................................................SSAD/352/13
9.WORKU DERBEW ................................................................................SSAD/346/13

Submitted to Mr. Bisrat G.

Submission date:19/04/2015 E.C

 Introduction
In this paper we are going to discuss various concepts associated with capital markets
and economic impact of establishing capital market in developing country like Ethiopia.
This paper will have two sections. The first section will be about Capital markets, which
are financial markets that bring buyers and sellers0020together to trade stocks, bonds,
currencies, and other financial assets. The seco006Ed one deal with
1.1 capital markets
Capital markets are financial markets where long-term securities such as stocks, bonds, and other
financial instruments are bought and sold. Capital markets include the stock market and the bond
market. They help people with ideas become entrepreneurs and help small businesses grow into
big companies. They also give folks like you and me opportunities to save and invest for our
futures. These markets are used by companies, governments, and other organizations to raise
capital for investment and growth. Capital markets are typically divided into two main
categories: primary markets and secondary markets.
Primary markets are where new securities are issued and sold for the first time. This is typically
done through an initial public offering (IPO) where a company sells shares of its stock to the
public for the first time. The proceeds from the sale of these securities go directly to the issuer.
Secondary markets are where existing securities are bought and sold between investors. This is
where most trading activity takes place, and it provides liquidity to investors who want to buy or
sell securities. The prices of securities in the secondary market are determined by supply and
demand, and they can fluctuate based on a variety of factors such as economic conditions,
company performance, and investor sentiment.
Capital markets play an important role in the economy by providing a way for companies and
governments to raise capital for investment and growth. They also provide investors with
opportunities to invest in a wide range of securities and earn returns on their investments.
However, capital markets can also be risky, and investors need to carefully consider the risks and
rewards of investing in different securities before making investment decisions.
1.2 Economic impact of establishing capital market
Establishing a capital market can have a significant economic impact on developing countries
like Ethiopia. The capital market provides long-term debt and equity finance for the government
and corporate sector. The economic services which a well regulated and efficiently run capital
market can render to a country with a large private sector are considerable.Establishing a capital
market can have both positive and negative economic impacts, particularly in developing
countries like Ethiopia.
 Here are some potential benefits:
1. Increased investment: A capital market provides a platform for companies to raise capital by
issuing stocks and bonds. This can attract both domestic and foreign investors, leading to
increased investment in the country.
2. Improved corporate governance: Companies that are listed on a capital market are subject to
greater scrutiny and regulation, which can lead to improved corporate governance practices. This
can help to reduce the risk of fraud and mismanagement, which can improve investor confidence
and attract more investment.
3. Increased liquidity: A capital market provides a platform for investors to buy and sell
securities, which can increase liquidity in the market and make it easier for companies to raise
capital. This can help to reduce the cost of capital for companies, which can encourage more
investment and economic growth.
4. Job creation: The establishment of a capital market can create jobs in areas such as finance,
accounting, and legal services.
5. Economic growth: A well-functioning capital market can contribute to overall economic
growth by providing companies with the capital they need to expand and create new products
and services. Here are some ways in which a capital market can provide economic growth:

 Capital formation: A capital market provides a platform for companies to raise capital by
issuing stocks and bonds. This can help companies to finance their growth and expansion
plans, which can lead to increased economic activity and job creation.
 Innovation: A capital market can provide funding for innovative companies and startups,
which can help to drive technological advancements and new product development. This
can lead to increased productivity and economic growth.
 Increased investor participation: A well-functioning capital market can attract both
domestic and foreign investors, which can increase the pool of available capital and
provide more opportunities for companies to raise funds. This can help to stimulate
economic growth and development.
Overall, a capital market can provide an important source of funding for companies and help to
drive economic growth. However, it's important to ensure that the market is well-regulated and
that investor protection measures are in place to prevent fraud and other abuses.
 Some of the negative economic impacts of establishing a capital market in Ethiopia could
include:
1. Diversion of resources: Establishing a capital market requires significant resources,
including financial, human, and technological resources. This could divert resources away from
other important sectors of the economy, such as agriculture, education, and healthcare.
2. Increased inequality: Capital markets tend to benefit the wealthy and those with access to
capital, which could exacerbate income inequality in Ethiopia.
3. Volatility: Capital markets can be volatile, with prices of securities fluctuating rapidly. This
could lead to instability in the economy and discourage investment.
4. Lack of investor confidence: If investors do not have confidence in the transparency and
fairness of the capital market, they may be hesitant to invest, which could limit the growth of the
market.
5. Regulatory challenges: Establishing and regulating a capital market requires a strong legal
and regulatory framework, which may be lacking in developing countries like Ethiopia.
It is important to note that these negative impacts can be mitigated through careful planning,
effective regulation, and targeted policies to ensure that the benefits of the capital market are
shared more broadly across the economy.
However, establishing a capital market also comes with challenges, such as the need for strong
regulatory frameworks and investor protection measures. It's important for policymakers to
carefully consider these issues when developing a capital market in a developing country like
Ethiopia.
Summary
 References
https://www.stlouisfed.org/en/education/tools-for-enhancing-the-stock-market-game-invest-it-
forward/episode-1-understanding-capital-markets