BUSF_A01.qxd

9.1 Introduction

The capital market is a title given to the market where long-term finance is raised by

businesses and by local and national governments. Businesses raise this type of

finance through the issue of equity (shares) and debt (loan notes, debentures or bonds)

to members of the public and to investing institutions (unit trusts, insurance busi-

nesses and so forth), usually in exchange for cash. It is also a market where holdings

of equity or debt (securities) may be transferred from one investor to another.

The new finance market is known as the primary capital market, whereas the mar-

ket in which second-hand securities are traded is referred to as the secondary capital

market. We have already considered this primary role in Chapter 8. In this chapter we

shall confine ourselves to consideration of the secondary aspect.

Secondary capital markets

The most important secondary capital markets throughout the world tend to be the

official stock exchanges or stock markets. They are not the whole of the secondary cap-

ital market, however – certainly not in the UK, as we shall see later in the chapter.

Nonetheless, the world’s official stock exchanges are the major forums for trading

local, and increasingly international, securities. Most of these official stock exchanges

fulfil a primary function as well as a secondary one.

The secondary capital market (the

stock exchange) and its efficiency

In this chapter we shall deal with the following:

‘the role of the capital markets in their secondary function

9.2 The London Stock Exchange

9.4 Tests of capital market efficiency

‘tests of efficiency

‘the implications of capital market efficiency

Chapter 9

Objectives