Stocks in trade - Stocks in trade Nov 11th 1999 From The Economist print edition Stock and bond markets are the trading places for capital Our fourth

Stocks in trade Nov 11th 1999 From The Economist print edition Stock and bond markets are the trading places for capital. Our fourth schools brief on finance explains how the markets guide capital around the world economy, and how they continue to evolve to meet the needs of savers, companies and governments NOT so long ago, stockmarkets were derided by critics from communist countries as emblems of capitalism’s greed and instability. Now, ten years after the Berlin Wall came down, it is hard to find a country without its own bourse. In Poland, the Warsaw Stock Exchange even occupies the former headquarters of the Communist Party. Despite China’s commitment to state control of its economy, it has two stock exchanges, even without counting a third that it inherited from Hong Kong. The number of developing countries with stockmarkets has doubled during the 1990s (see chart 1). Why is everyone betting on the markets? Part of the answer is that capital markets have proved remarkably efficient at bringing savers and borrowers together. Capital is just another word for stored wealth and resources, which can take many forms. And markets, as basic economics shows, are the least bad way to set prices and to allocate scarce resources. The key difference between capital markets and financial intermediaries, such as banks or life insurers, is that capital markets cut out middlemen. Where banks and institutions stand between savers and investors, directing the flow of resources, capital markets bring the two parties face to face.

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The two main types of capital markets are equity markets , for trading company shares (or equities), and bond markets , for trading the debt of companies and governments. Both perform two crucial functions in the economy. They move resources across space and time, from where they are in surplus to where they are needed most. And they produce valuable information, through the prices they set, that firms, households, and governments use to manage resources better. Although the forms of capital markets have changed significantly over the years, these broad functions have remained the same. That is not enough to silence critics, however. Many argue that share and bond prices gyrate wildly, with no underlying justification, and that financial markets exert too much control over the world’s resources. They point to America’s great crash of 1929 and Japan’s long stockmarket slump in the 1990s as evidence that volatile capital markets can wreak havoc on the real economy. Yet such events are usually symptoms of broader ills, not causes. The apparent chaos of the trading floor should, over the long term, lead to greater efficiency in the real economy—and will certainly work better than any centrally planned alternative.