Pearson Edexcel · A-Level · Economics B

    Course version: 9EB0 · Version from Sept 2015

    The role of the financial sector: g) To provide a market for equities

    Full specification wording

    The role of the financial sector: g) To provide a market for equities

    The financial sector plays a crucial role in providing a market for equities, which are shares representing ownership in a company.

    Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .

    • Point 7 of 7
    • 3 key terms

    Study notes

    From the checked teaching notes for this specification point.

    The idea

    The financial sector plays a crucial role in providing a market for equities, which are shares representing ownership in a company. This market, typically a stock exchange like the London Stock Exchange, facilitates the buying and selling of these shares. By providing this marketplace, the financial sector allows businesses to raise long-term capital to fund expansion. For example, a growing tech firm might issue new equities to finance a new factory. Simultaneously, it provides investors with an opportunity to purchase a stake in businesses, potentially earning returns through dividends and capital gains. The secondary market ensures liquidity, meaning investors can easily convert their equities back into cash by selling them to other investors, which encourages initial investment.

    What earns the marks

    • Identifies that equities represent ownership shares in a public or private limited company.
    • Explains that the primary equity market allows firms to raise new capital by issuing shares.
    • Explains that the secondary equity market provides liquidity by allowing investors to trade existing shares.
    • Recognises that equity markets facilitate corporate growth and investment by connecting savers with borrowers.

    Common mistakes and how to put them right

    • Confusing equities with bonds.

      Put it right: Equities represent ownership and pay variable dividends, whereas bonds represent debt and pay fixed interest.

    • Assuming the company receives money every time its shares are traded.

      Put it right: Companies only raise capital during the initial issuance in the primary market, not during secondary market trading.

    • Believing that equity markets guarantee a return for investors.

      Put it right: Equity investments carry risk, and returns depend on company performance and market conditions.

    Exam tips

    • When evaluating the role of financial markets, distinguish clearly between the primary market for raising capital and the secondary market for providing liquidity.
    • Use real-world examples of stock exchanges, such as the London Stock Exchange, to illustrate where equity trading occurs.
    • Remember to link the provision of an equity market to broader macroeconomic objectives, such as economic growth driven by corporate investment.

    Try the lesson

    The start of the The role of the financial sector: g) To provide a market for equities lesson, made from checked teaching notes for this specification point.

    Have a go first

    What is the primary purpose of a company issuing shares on an equity market?

    Listen

    The financial sector plays a crucial role in providing a market for equities, which are shares representing ownership in a company. This market, typically a stock exchange like the London Stock Exchange, facilitates the buying and selling of these shares. By providing this marketplace, the financial sector allows businesses to raise long-term capital to fund expansion. For example, a growing tech firm might issue new equities to finance a new factory. Simultaneously, it provides investors with an opportunity to purchase a stake in businesses, potentially earning returns through dividends and capital gains. The secondary market ensures liquidity, meaning investors can easily convert their equities back into cash by selling them to other investors, which encourages initial investment. A strong answer earns marks for these points. Identifies that equities represent ownership shares in a public or private limited company. Explains that the primary equity market allows firms to raise new capital by issuing shares. Explains that the secondary equity market provides liquidity by allowing investors to trade existing shares. Recognises that equity markets facilitate corporate growth and investment by connecting savers with borrowers. Exam tip: When evaluating the role of financial markets, distinguish clearly between the primary market for raising capital and the secondary market for providing liquidity.

    See it

    A top-down flowchart. At the top, a node labelled "Equities: ownership shares in a company" branches into two nodes: "Primary equity market" and "Secondary equity market". From the primary market, an arrow leads to "Firms raise new capital by issuing shares", which leads to "Funds corporate expansion". From the secondary market, an arrow leads to "Investors trade existing shares", which leads to "Liquidity: equities converted back into cash", which leads to "Encourages initial investment". Both "Funds corporate expansion" and "Encourages initial investment" lead to a final node, "Connects savers with borrowers".
    It shows how equities split into a primary market where firms raise new capital for expansion and a secondary market that provides liquidity and encourages investment, both connecting savers with borrowers.

    Key words

    Say what each word means before you turn the card.

    Capital raising

    Try answering aloud or in your head before turning the card.

    Liquidity

    Try answering aloud or in your head before turning the card.

    Investment and growth

    Try answering aloud or in your head before turning the card.

    See every definition
    Capital raising
    Allowing businesses to raise long-term capital to fund expansion by issuing new equities in the primary market.
    Liquidity
    The ability of investors to easily convert their equities back into cash by selling them to other investors in the secondary market.
    Investment and growth
    Equity markets facilitate corporate growth and investment by connecting savers with borrowers.

    Label the diagram

    Some boxes have lost their names. Pick the right name for each number.

    The diagram again, with 3 boxes numbered instead of named. A top-down flowchart. At the top, a node labelled "Equities: ownership shares in a company" branches into two nodes: "Primary equity market" and "Secondary equity market". From the primary market, an arrow leads to "Firms raise new capital by issuing shares", which leads to "Funds corporate expansion". From the secondary market, an arrow leads to "Investors trade existing shares", which leads to "Liquidity: equities converted back into cash", which leads to "Encourages initial investment". Both "Funds corporate expansion" and "Encourages initial investment" lead to a final node, "Connects savers with borrowers".

    • 1Box 1

    • 2Box 2

    • 3Box 3

    0 of 3 labelled

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