Introduction
This paper highlights the purpose of capital market and the difference between capital money securities and money market securities in terms of characteristics. Furthermore, the paper will discuss how supply charges went down because of the 2001 terrorist assault and the Enron financial outrage.
Purpose of Capital Market
By definition, capital market may be described as a bazaar that allows people and business enterprises to borrow and lend long-standing capital funds. Capital souk is an outlay that offers an ideal source of external finance. It forms an important part of a country’s financial system.
According to Jordan, Miller, and Dolvin (2011), it represents all the amenities and business preparations for getting and giving out medium-term and long-standing finances. The capital market creates a room for the channeling of the savings of countless depositors into different useful avenues of investments.
This strategy enables the market to attract new investors who are willing to make new funds available to business (Jordan et al., 2011). Furthermore, capital bazaar offers a method where clients and suppliers can trade securities at jointly agreeable rates.
What Distinguishes Capital and Currency Bazaar Securities
Capital souk and money bazaar differ in terms of their characteristics. To begin with, financial institutions, stock exchanges, companies, foreign, and local investors are often the participants in the capital market (Mishkins & Eakins, 2012). The main contributors of the money market are institutional, rather than individual investors.
In terms of instruments of trade, the capital market is accustomed to equity shares, debentures, preference shares, and bonds. In the money market, the instruments of trade are trade bills, treasury statements, certificates of deposit, and commercial papers.
According to Mishkins and Eakins (2012), the capital market deals with long-term and medium-term securities whereas the money market deals with short-term securities that have a maximum duration of one year. Capital market instruments are quite risky in terms of returns and repayment of the principal amount. On the other hand, money market instruments are safer because financially sound institutions issue them (Mishkins & Eakins, 2012).
Explaining the Falling Stock Prices using Gordon Growth Model
The Gordon growth model is a method that economists and investors use to determine the worth of a share based on a sequence of dividends whose growth rate can be described as constant. The 2001 terrorist attack led to market chaos whereby investors engaged in panic to the extent of selling their assets in the fear that the stock prices would tumble.
The events were worsened by the fact that the New York Stock Exchange was not operational until September 17. This duration was the longest shutdown of the US stock market since 1933. The same situation was witnessed during the Enron financial scandal where investors were duped into believing that the company had a bright future.
Based on the Gordon Growth model, stock prices declined because firms were considered not to be in a state of stable growth. It is assumed that the terrorist attacks and the collapse of Enron brought about a volatility contagion (Ball, 2012). Hence, the short-run reliance on market returns in the US market decreased tremendously in the emerging stock markets.
Conclusion
Despite the economic shock that arose from the 9/11 terrorist assault and the financial scandal that rocked Enron, the US economy can only be described as legendary. This claim is based on the US economy’s strength and resilience that were manifested during the turbulent financial period. Nevertheless, the stability of the stock market made it possible for investors to regain the stock prices after the 9/11 attack.
Reference List
Ball, L. (2012). Money Banking and Financial Markets. New York, NY: Palgrave Macmillan, 2012.
Jordan, B., Miller, T., & Dolvin, S. (2011). Fundamentals of Investments. New York, NY: McGraw Hill Education.
Mishkin, F., & Eakins, S. (2012). Financial Markets Institutions. Boston, MA: Prentice Hall.