The quest for capital – and places to invest it – extends beyond national borders.
When companies open business operations abroad or form joint partnerships with companies based in other countries, they become players in an international capital marketplace. The same is true when the individual or institutional investors put their capital to work outside their national borders.
What are global capital markets?
A global capital market is the interconnection of different investment exchanges worldwide that allow individuals and entities to buy and sell financial securities on an international level. The interconnection of these various exchanges leads to the emergence of an informal but still structured global capital market. In other words, global capital markets are a place where savings meet investment.
As the complexity and interlinking of the global economy grow, so do the capital markets. At present, financial institutions worldwide transfer billions of dollars in assets and investments on cross-border exchanges every day.
Understanding equity and debt capital
The investment opportunities come in two forms: Equity Capital and Debt Capital.
Equity capital is raised by issuing company shares, publicly or privately, and is used to finance the business expansion. This involves setting the right price, advertising the shares to fund managers and other potential investors, and keeping accounts before the shares are open to public trading.
The debt market is where investments in loans are bought and sold. Transactions are mainly made between brokers or large institutions or by individual investors. This includes government bonds, investment-grade corporate bonds, high-yield bonds, etc.
What are mature and developing markets?
World markets fall into two categories: mature and developing.
Mature markets, in particular, are in Europe, North America, Australia, New Zealand, and Japan. They tend to be highly regulated and create a welcoming environment for matching between seekers and providers of capital. They also foster an active secondary market.
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Developing markets, also known as emerging markets or economies, are usually newer than mature markets and have fewer active participants, resulting in less liquidity and greater volatility. As a result, the trading mechanisms are often less efficient as well. These markets may also be more vulnerable to political control or instability, particularly if the country has a short history of democracy or if ethnic and religious controversies threaten economic development.
Being labeled as developing or emerging is not always a clear indication of how a market operates. For example, some of these markets are more vibrant and stable than others and tend to attract more investor attention because they offer opportunities for long-term gain. This is especially true where local populations are becoming more affluent and the economies have sustained growth.
When the World Bank identifies member nations as developing countries, its main criterion is the income per capita rather than the sophistication of its financial markets.
What are the advantages of global capital markets?
The potential benefits of the global capital market can profoundly impact both the economy as a whole and individual enterprises.
One benefit of cross-border investing is that strong economic growth in one part of the world can stimulate growth in other regions. That can be good for the investors and good for the economies where the markets operate. However, one potentially harmful consequence of globalization is that problems in the economy of one nation or region may have a ripple effect on the economies of many others – even though the significant factor in any nation’s financial health is what’s happening at home.
Broader horizons
Rules governing securities trading, investor protections, and accounting standards have traditionally varied from country to country. But conflicting requirements can restrict the flow of capital across international borders and inhibit the ability to control global fraud. So the United States and the European Union, in particular, are collaborating to create a common regulatory environment that fosters investment.
Corporations and governments, which engage the public in capital, can attract investors worldwide, not just in a specific geographical market. Investors can invest in assets that best meet their investment objectives, whether in developing economies to achieve high growth or in stable economies that are mature to protect investments better.
Some markets are open to all investors, while others limit the participation of non-residents. That’s because some nations face a dilemma in seeking international capital. On the one hand, this capital can provide welcome growth. But at the same time, it may have the potential to undermine domestic control and stability. As a result, when they seek to attract international investment, securities markets in emerging economies have strengthened their regulatory practices, improved transparency, and streamlined their clearance and settlement systems to handle the exchange of securities and cash payments.
How do global capital markets work?
US investors seeking greater diversification may look abroad when they have the capital to invest. At the same time, companies based abroad may want to tap the wealth of the US markets. If they do, they may offer their stock shares on the US market through a US bank, known as a depositary.
The depositary bank holds the issuing company’s shares in this arrangement, known as American depositary shares (ADSs). In addition, the bank offers investors the chance to buy a certificate known as an American depositary receipt (ADR), representing ownership of a bundle of depositary shares.
To have their ADRs listed on an exchange, companies must provide English-language versions of their annual reports, adhere to accepted US accounting practices, and grant certain shareholder rights.
In addition, they must meet listing requirements imposed by the exchange or market where they wish to be traded. Many ADRs aren’t listed on an exchange, often because they are too small to meet listing requirements. Instead, they’re traded over-the-counter (OTC). Some issuing companies register with the SEC and submit the required filings.
Others do not, which means you may not be able to get the same level of information about the company as you can with a registered ADR. The OTC markets are also generally less liquid than the major exchanges, making OTC ADRs more difficult to sell at the time and price you want.
What is the role of the World Bank in global capital markets?
When a company makes depositary arrangements to sell its stock in two or more countries, the shares are called global depositary shares, and they are sold as global depositary receipts (GDRs). In all other ways, they work the same way as ADRs.
The World Bank, or, more formally, the International Bank for Reconstruction and Development (IBRD), is an investment bank that raises money by issuing bonds to individuals, institutions, and governments in more than 100 countries. The governments of the 188 countries, which own the bank, guarantee the bonds.
The World Bank lends the money from its investors to the governments of developing countries at affordable interest rates to help finance internal projects and economic policy reforms. Long-term loans to the poorest nations through the bank’s International Development Association (IDA) are interest-free.
The Bank’s International Finance Corporation (IFC) provides funds for private enterprises in developing nations and helps stimulate additional financing from other investors. In addition, its affiliate, the Multilateral Investment Guarantee Agency (MIGA), promotes private investment by providing guarantees that protect investors from political risks, such as the possibility that public corporations could be nationalized. Without this safety net, investors might otherwise be reluctant to participate.
All You Have To Know About Global Capital Markets by Inna Rosputnia
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