For this discussion forum,
Discuss the evolution of the securities markets, including the impact of the NASDAQ, CME, ECNs, and foreign exchanges.
Explain the role of securities markets in the efficient allocation of capital among issuers and investors based on the efficient market hypothesis.
Evaluate if the presence of dark pools enhances or reduces capital market efficiency.
Finally, find a real-life company that has made raised capital in 2020 and discuss the method used. If possible, try to select a company that a fellow student has not already selected.
Full Answer Section
The efficient market hypothesis (EMH) states that securities prices reflect all available information, and that it is impossible to consistently outperform the market by trading on past information. The EMH has been challenged by some studies, which have found that certain investors are able to consistently outperform the market. However, the EMH remains the dominant theory of how securities markets work.
Dark pools are private trading platforms that allow investors to trade securities anonymously. Dark pools have been criticized for reducing the transparency of the securities markets and making it more difficult for investors to get the best prices. However, dark pools also offer certain advantages, such as allowing investors to trade large blocks of securities without affecting the market price.
The impact of dark pools on capital market efficiency is a complex issue. Some argue that dark pools reduce capital market efficiency by making it more difficult for investors to get the best prices. Others argue that dark pools can actually improve capital market efficiency by allowing investors to trade more efficiently.
In 2020, there were many companies that raised capital. One example is Roblox, a gaming company that raised $520 million in an initial public offering (IPO). Roblox used the IPO to fund its growth and expansion. Another example is Zoom Video Communications, a video conferencing company that raised $1.9 billion in a secondary offering. Zoom used the secondary offering to provide liquidity to its existing shareholders.
The method used by a company to raise capital will depend on a number of factors, such as the size of the capital raise, the company's stage of development, and the regulatory environment. Some common methods of raising capital include:
- Initial public offering (IPO): An IPO is a process by which a company sells its shares to the public for the first time.
- Secondary offering: A secondary offering is a sale of shares by existing shareholders.
- Private placement: A private placement is a sale of shares to a select group of investors.
- Debt financing: Debt financing is a loan that is repaid with interest.
- Venture capital: Venture capital is a type of investment that is made in early-stage companies with high growth potential.
The choice of method will depend on the specific circumstances of the company and the needs of the investors.
Sample Answer
The securities markets have evolved significantly over time, from the early days of trading on physical exchanges to the modern era of electronic trading. Some of the key developments that have shaped the evolution of the securities markets include:
- The introduction of the NASDAQ stock exchange in 1971, which was the first electronic stock exchange. The NASDAQ revolutionized the way stocks were traded, making it possible to trade securities more quickly and efficiently.
- The creation of the Chicago Mercantile Exchange (CME) in 1874, which was the first futures exchange. The CME introduced the concept of trading futures contracts, which allowed investors to hedge against risk and speculate on future prices.
- The development of electronic communication networks (ECNs) in the 1990s, which allowed investors to trade directly with each other without going through a broker. ECNs have made it possible for investors to trade more quickly and cheaply.
- The rise of foreign exchanges (FX) in the 1970s, which allowed investors to trade currencies. FX markets have become increasingly important in recent years, as the global economy has become more integrated.