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's the difference between monetary policy and fiscal policy?

    Fiscal policy is the collective term for the taxing and spending actions of governments. Monetary policy is the management ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. How Do Fiscal and Monetary Policies Affect Aggregate Demand?

    Learn about the impact fiscal and monetary policy have on aggregate demand, and discover how the government influences economic ... Read Answer >>
  5. What are some examples of expansionary fiscal policy?

    Learn about expansionary fiscal policy – tax cuts and government spending – that are used by governments to boost spending ... Read Answer >>
  6. 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 >>
Related Articles
  1. Taxes

    What's an Indirect Tax?

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

    What are Government Securities?

    Government securities are debt instruments that governments issue to raise capital.
  3. Insights

    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.
  4. Insights

    How Governments Influence Markets

    The biggest influence in the markets today can create some unintended consequences.
  5. Taxes

    What is a Direct Tax?

    Governments and taxing entities impose direct taxes directly on individuals and businesses.
  6. Small Business

    Government Regulations: Do They Help Businesses?

    These rules are in place to protect consumers and help businesses thrive at the same time.
  7. Insights

    The Top 6 Ways Governments Fight Deflation

    Here are six monetary and fiscal policy tools that governments use to fight deflation.
  8. Investing

    The Basics Of Investing In Foreign Government Bonds

    Individuals contemplating the purchase of government bonds need to understand the risks of bond investing.
  9. Small Business

    Risks Associated With Government Contracts

    Government contracts can be rewarding, but they also come with a variety of risks.
RELATED TERMS
  1. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  2. Indirect Sales

    The sale of a good or service by a third-party, such as a partner ...
  3. Indirect Method

    A method for creating a statement of cash flows a company may ...
  4. Policy Mix

    A government's combined use of fiscal policy and monetary policy ...
  5. Limited Government

    A political system in which legalized force is restricted through ...
  6. Government Security

    A bond (or debt obligation) issued by a government authority, ...
Hot Definitions
  1. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  5. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  6. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
Trading Center