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?

    Learn how monetary policy refers to bank actions to control interest rates and money supply, while fiscal policy refers to ... 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 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. How does contractionary fiscal policy lead to the opposite of the crowding out effect?

    Find out how contractionary fiscal policy can theoretically lead to a crowding-in effect in the credit market by encouraging ... 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. Insights

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  2. 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.
  3. Trading

    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. Insights

    Fiscal Vs. Monetary Policy Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy and fiscal policy.
  5. Insights

    How Governments Influence Markets

    The biggest influence in the markets today can create some unintended consequences.
  6. Insights

    The Top 6 Ways Governments Fight Deflation

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

    What The U.S. Needs To Do To Avoid Austerity Measures

    Here's a look at some of the methods the federal government is using to help economic recovery in the U.S.
  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

    Government Regulations: Do They Help Businesses?

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

    A tax that increases the price of a good so that consumers are ...
  4. Indirect Sales

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

    A method for creating a statement of cash flows a company may ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
Hot Definitions
  1. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  2. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  3. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  4. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
  5. Retained Earnings

    Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested ...
  6. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. ...
Trading Center