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Equity, as opposed to debt capital, confers ownership rights in the company to the capital provider and never has to be repaid. Such risk capital is essential for companies expanding into new markets or those starting up with uncertain outcomes. Equity markets give businesses access to the capital they need for innovation, value creation and growth. And because it is long-term capital, equity allows companies to take a longer-term approach to the pursuit of growth.
Equity is also an essential asset for saving, as it has historically generated higher returns than any other conventional liquid asset class. At a time when Europe is facing a huge challenge to fund the retirement of its growing population, these superior returns are an invaluable part of the investment mix.
Healthy equity market helps create jobs. In the US, businesses have tended to grow far more quickly after raising capital on equity exchanges, with corresponding expansions in their workforces. This suggests that the same would likely be true in Europe. If Europe’s equity markets recovered to their previous highs relative to the size of the economy, this would substantially increase the level of equity funding in the economy, encourage entrepreneurial businesses, and enlarge the pool of potential investments for investors, including pension funds.
And equity markets are not only important for business, they also provide essential liquidity in the secondary markets for investment. The secondary equity markets match buyers and sellers. They set prices for companies’ shares and provide a liquid market, facilitating trading and making it easier for companies to raise equity capital. Academic studies have shown that a liquid equity market accelerates a country’s economic growth. However, that liquidity could come under threat from a number of regulatory proposals.