A:

Governments generally say they don't like to take an active role in the securities market (except for regulating it); however, there are methods and policies by which the government's actions may have an indirect influence on the market.

Fiscal policies that affect the taxation of capital gains, dividends and interest gains may eventually have an effect on market activity. For example, favorable policies such as tax cuts could persuade investors to become more active in buying and selling securities, while unfavorable policies might cause individuals to move to fixed-income securities or alternative investments (such as real estate or other appreciable assets).

Furthermore, through monetary policies, governments can indirectly involve themselves in the market by adjusting interest rates and taking part in open-market operations. In theory, cutting rates will discourage investors and companies from putting (or parking) their money into fixed-income investments - the lower rates instead may encourage borrowing for investment purposes.

The market is also affected by the bills and laws passed by the various levels of government. This can occur for those laws directed specifically at the securities market or those that have an indirect affect. For example, on the direct side, the government inacted the Sarbanes-Oxley Act in 2002, which established stricter securities regulations on publically traded companies. This has led to stricter accounting and auditing guidelines, increased corporate responsibility and increased disclosure, with the intention of providing more clarity for investors.

On the indirect side, if the government reduces spending in areas such as health care or defense, companies in these sectors will likely sell off as they rely in part on government funds.

To keep reading about this subject, see What Is Fiscal Policy?

RELATED FAQS

  1. What are some examples of different corporate governance systems across the world?

    Read about the three major types of corporate governance systems: the Japanese model, the Anglo-Saxon model and the continental ...
  2. What are some benefits of a mixed economic system?

    Learn the benefits of a mixed economic system such as the ability to combine capitalism and socialism and correct for externalities ...
  3. What average annual growth rate is typical for the banking sector?

    Learn the typical average annual growth rate for the banking sector and why regulatory requirements have a profound effect ...
  4. How does neoclassical economics relate to neoliberalism?

    Read about neoliberalism and neoclassical economics, two political and economic movements that argued for lower taxes, less ...
RELATED TERMS
  1. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...
  2. Structured Transaction

    A series of transactions that could have been treated as a single ...
  3. Tenured Capital

    Loans offered by the government to key business sectors.
  4. The New Deal

    A series of domestic programs designed to help the United States ...
  5. Ginnie Mae Pass Through

    A type of investment issued by the Government National Mortgage ...
  6. PCI Compliance

    Technical and operational standards that businesses are required ...

You May Also Like

Related Articles
  1. Economics

    What are some examples of different ...

  2. Stock Analysis

    Playing Rising Rates with Ultra-Short ...

  3. Economics

    Is Texas The Future Of America?

  4. Stock Analysis

    3 Stocks To Buy and Hold For the Rest ...

  5. Economics

    Whole Foods, Price Gouging And Sky-High ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!