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 impact does economics have on government policy?

    Learn about the impact of economic conditions on government policy and understand how governments engineer economic conditions ... Read Answer >>
  2. What are the different groups involved in corporate governance?

    Learn about the challenges inherent to defining and executing corporate governance, and understand why different groups work ... Read Answer >>
  3. How do open market operations affect the overall economy?

    Understand how open market operations affect the overall economy. Learn how the Federal Reserve uses open market operation ... Read Answer >>
  4. How can a change in fiscal policy have a multiplier effect on the economy?

    Learn about how changes in fiscal policy have a multiplier effect on the economy. The goal of expansionary fiscal policy ... Read Answer >>
  5. Who sets fiscal policy, the president or congress?

    Discover how fiscal policy is set in the United States, including how all three branches of government can affect a given ... Read Answer >>
  6. What is the indirect method of calculating cash flow from operating activities?

    Understand why the indirect method is used to calculate a company's cash flow from operating activities, and learn what adjustments ... Read Answer >>
Related Articles
  1. Economics

    A Look At Fiscal And Monetary Policy

    There's a debate over which policy is better for the economy. Find out which side of the fence you're on.
  2. Taxes

    What's an Indirect Tax?

    An indirect tax is levied on goods or services rather than on an individual or a company.
  3. Economics

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
  4. Economics

    Macroeconomics: Government - Expenditures, Taxes and Debt

    By Stephen Simpson ExternalitiesIn a market economy there are important differences between public and private goods. Private goods are considered "rival and excludable" - one person consuming ...
  5. Economics

    How Unconventional Monetary Policy Works

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
  6. Entrepreneurship

    Risks Associated With Government Contracts

    Government contracts can be rewarding, but they also come with a variety of risks.
  7. Options & Futures

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
  8. Economics

    Crowding Out Effect

    Crowding out effect is an economic term referring to government spending driving down private sector spending, and can have several more specific meanings.
  9. Economics

    Austerity: When The Government Tightens Its Belt

    When a government tightens its belt in tough economic times the entire nation feels the squeeze.
  10. Economics

    4 Factors That Shape Market Trends

    Market trends are shaped by larger economic factors, such as government influence, internal transactions, speculation and supply and demand.
RELATED TERMS
  1. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  2. Policy Mix

    A government's combined use of fiscal policy and monetary policy ...
  3. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  4. Indirect Method

    A method for creating a statement of cash flows a company may ...
  5. Corporate Governance

    The system of rules, practices and processes by which a company ...
  6. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center