Role of the financial market in attracting external financial resources to finance the activities of enterprises plan

2. The need for external financial resources in business entities
Successful economic planning in developing countries depends on the ability to achieve a rapid and balanced growth of investment in both the government sector and the corporate sector. Access to finance improves post-entry performance of start-ups and industries which are more dependent on external finance grow relatively faster in countries with more developed financial markets, thanks to enhanced information sharing and risk management, and a better allocation of resources to profitable investment projects. On the other hand, financing constraints that prevent firms from investing in innovative projects, seizing growth opportunities, or undertaking restructuring in case of distress negatively affect productivity, employment, innovation and income gaps. gggggggggggggggggggggggg
One piece of the financial system is the set of financial markets through which households can directly provide resources for investment. Two important financial markets are the market for bondsand the market for stocks. A person who buys a bond from, say, Apple Corporation becomes a creditor of the company, while a person who buys newly issued stock from Apple becomes a part owner of the company. (A purchase of stock on a stock exchange, however, represents a transfer of ownership shares from one person to another and does not provide new funds for investment projects.) Raising investment funds by issuing bonds is called debt finance, and raising funds by issuing stock is called equity finance.
Longstanding challenges in accessing bank finance limit SME growth in many countries.
Bank lending is the most common source of external finance for many SMEs and entrepreneurs, which are often heavily reliant on straight debt to fulfil their start-up, cash flow and investment needs. SMEs, however, typically find themselves at a disadvantage with respect to large firms in accessing debt finance1 Asymmetric information and agency problems, including high transaction costs, and SMEs’ opacity limit access to credit by small businesses and start-ups, in particular, which are often under-collateralized, have limited credit history and, and may lack the expertise and skills needed to produce sophisticated financial statements. Access to debt finance is also more difficult for firms with a higher risk-return profile, such as innovative and growth-oriented enterprises, whose business model may rely on intangibles and whose profit patterns are often difficult to forecast (OECD, 2018). In middle- and low-income countries, funding gaps are often even more pronounced and among the main barriers to small business formalization. Moreover, while a large share of SMEs do not have access to formal credit, long-term credit to sustain investment and innovation is even scarcer, which severely limits growth opportunities.
Figure-1. SME loan rejection rates vary greatly across countries² jjjjjjjjjjj
There are opportunities for SMEs to tap into a wide range of alternative financing instruments
In recent years, an increasing range of financing options has become available to SMEs, although some of these are still at an early stage of development or, in their current form, only accessible to a small share of SMEs. While debt finance offers moderate returns for lenders and is therefore appropriate for low-to-moderate risk profiles, i.e. firms that are characterized by stable cash flow, modest growth, tested business models, and access to collateral or guarantees, alternative financing instruments alter this traditional risk sharing mechanism. These instruments consist of multiple and competing sources of finance for SMEs, including asset-based finance, alternative forms of debt, hybrid tools and equity instruments and not all are suitable and of interest for all enterprises, depending on their risk-return profile, stage in the business life cycle, size, scale, management structure and financial skills
Finance instruments that pose fewer risks to investors can flourish more readily and even in the absence of comprehensive, transparent, and standardized credit data, especially when backed by collateral or guarantees by the enterprise. Accessing asset-based finance, in particular, depends on the liquidation value of the underlying asset, rather than on the creditworthiness of the business. Survey data also show that these instruments are more widely known and used by entrepreneurs compared to riskier finance instruments. fggggggggggggggggggggggggggggggggggggggg
They might sound confusing, but financial markets basically exist to bring people together so money flows to where it is needed most.
Think of companies like eBay, which match buyers and sellers to set a price for everything from second-hand furniture to the new iPhone. Financial markets match buyers and sellers to set a price for financial assets. They can provide an opportunity for you to invest money in shares (also known as equities) to build up money for the future. Over a long period of time this can often provide a better return than opening a savings account at your bank. However, buying shares can be risky Opens in a new window. It is important to remember that the value of any investment can go down as well as up, and getting good returns in the past does not always mean they will be good in the future.
Financial markets also allow people to take out insurance. Insurance companies need to use financial markets to make sure you will receive a pay-out if you have an accident, such as losing or damaging your mobile phone.
Financial markets enable banks to borrow money, helping them to make loans to people wishing to borrow – whether that’s attending university with a student loan, say, or buying a house with a mortgage. Financial markets encompass the part of a free market economic system in which people and entities can trade financial products like shares, debt securities, ‘derivatives’, and currencies. The trade of these products is essential to the workings of a market economy, allowing for the allocation of resources according to levels of supply and demand determined by buyers and sellers. Perhaps the best-known type of financial market is share markets, where portions of the ownership of companies are bought and sold by investors. The largest share markets in the world are located in the United States, followed by East Asia and Europe. Share markets play a vital role in global financial markets as they allow companies to raise money from investors to grow the company, while allowing investors to grow their wealth by connecting them to companies needing investment.³
Figure-2. Distribution of countries with largest stock markets worldwide, dddddddbddddddddddy share of total world equity market value⁴. dddddddddd

In 20201 stock markets in the United States accounted for nearly 56 percent of world stocks. The next largest country by stock market share was Japan, followed by China. The New York Stock Exchange (NYSE) and the NASDAQ are the largest stock exchange operators worldwide. ddddddddddddddddddddddd
Figure-3. Global domestic equity market capitalization from 2013 to H1 2021⁵
Equity market capitalization is an aggregate calculation that measures the total value of the entire equity market. This value is calculated by taking the individual market capitalizations of all available companies in the equity market and adding them together to arrive at the capitalization for the market as a whole. Changes in equity market capitalization are used to compare increases or decreases in the size of the market as a whole. The measure is also used to compare the value of the equity market relative to the values of markets of other asset classes, such as the bond market or other segments of the economy, including the value of the real estate market.
Market capitalization (or "market cap") refers to the total dollar market value of a company's outstanding shares as derived from its share price. Market cap is thus calculated by multiplying the number of a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size. A company's size is a basic determinant of various characteristics—such as riskiness or volatility—that is of interest to investors. It is also easy to calculate. For example, a company with 20 million shares outstanding that sell at $100 per share would have a market cap of $2 billion.
With the capitalization-weighted method, the index components with a higher market cap will receive a higher weighting in the index. Proportionally, the performance of companies with a small market cap will have less of an impact on the performance of the overall index. Other methods for computing the value of stock market indexes are the price-weighted, fundamental-weighted, and equal-weighted index construction methods.
Figure-4. Global equity market capitalization (overall)⁶ fddddddddddddfff

The U.S. equity markets are the largest in the world and continue to be among the deepest, most liquid and most efficient, representing 41.6% of the $117 trillion global equity market cap, or $49 trillion. This is 3.8x the next largest market, China. U.S. market share has averaged 37.4% over the last 10 years, troughing at 32.9% in 2012 and peaking at 42.0% in 2021. The S&P 500 index averaged 4,463.86 for the quarter and 4,391.27 for March, 1Q22 +15.5% Y/Y (peak 4,796.56, trough 4,170.70). The DJIA averaged 34,679.48 and 34,029.74, 1Q22 +9.9% Y/Y (peak 36,799.65, trough 32,632.64). The Nasdaq averaged 14,000.62 and 13,623.26, 1Q22 +4.9% Y/Y (peak 15,832.80, trough 12,581.22). And the Russell 2000 averaged 2,055.89 and 2,036.85, 1Q22 -6.5% Y/Y (peak 2,272.56, trough 1,931.29). The VIX averaged 25.37 for the quarter and 26.97 for March, 1Q22 -27.2% Y/Y (peak 36.45, trough 16.60).

ADVs were up Y/Y for ETFs and options but down for equity. Equity ADV was 12.9B shares for the quarter, -12.1% Y/Y (peak 19.2B, trough 10.1B). ETF ADV was 2.9B shares for the quarter, +47.9% Y/Y (peak 5.3B, trough 2.0B). Options ADV was 42.5M contracts for the quarter, +1.2% Y/Y (peak 63.0M, trough 33.8M).
For capital formation, total equity issuance was $28.9B for the quarter (-79.7% Y/Y) and the total IPO issuance was $2.3 (-94.5% Y/Y). The number of IPOs was down 75.8% Y/Y. Private equity deal value increased 1.3% Y/Y.
Figure-5. Capital markets for various purposes⁷

Companies need capital for various business purposes: invest in growth, fund mergers and acquisitions, etc. Firms have several ways to generate this capital, including initial public offerings (IPOs). If we take US as an example, we reach this statistics.⁸
Equity finance holds particular promise for firms with a high risk-return profile, such as new and innovative SMEs. Seed and early stage equity finance can boost firm creation and growth, while other equity instruments, such as specialized platforms for SME public listing, can provide financial resources to growth-oriented SMEs. Business angel investment may also play a significant role, although it is difficult to estimate their weight in SME financing due to data issues
The private capital market, through a full range of debt and equity instruments, offers advantages for small firms with a higher risk profile seeking flexible form and conditions. Finance through capital markets often complements rather than replaces bank financing; banks typically provide short-term working capital, and may work with investors in order to steer companies toward a mix of financial products that suits their needs. This pattern of financing might become more prevalent in the future, with banks operating at the short-term low-risk part of the market, while investors focus on higher-risk high-reward and low liquidity operations.