“Capital markets” refer to the markets where equity securities, or stocks, and fixed-income securities are bought and sold. The equity markets allow stock of companies, or shares of ownership, to be created, distributed, and traded among buyers and sellers. The fixed-income markets, also known as the debt markets, allow companies, governments, and other institutions such as universities or hospitals, to raise money by issuing loans in the form of bonds.
In the most basic sense, when a person uses the capital market to buy stock, he is buying a piece of a company and then owns it. When that same person buys a bond, he is effectively lending money to the organization that issued the bond and receives interest payments over time.
Benefits of Capital Markets for SMEs
As a buyer in the capital markets, a small business owner may invest in his own industry or purchase stock as a growth opportunity with plans to use the eventual gains on the business. As a seller, a small business owner can raise capital for the business, enable employees with any stock grants to turn shares into cash, and help value the business by selling shares.
New Financial Intermediaries
Financial intermediaries involved in the capital markets link up the buyers and sellers of these financial instruments. Banks, insurance companies, pension funds, investment dealers and investment funds are examples of financial intermediaries.
But this trading process has been transformed by FinTech. Electronic platforms have replaced trading places through automation platforms called ‘Robo-advisors’. These automated investment advisory platforms make use of algorithms and enormous amounts of data to provide financial advice. They make investing easy and inexpensive by cutting out the costly human advisor element.
Low Minimum Initial Investment Requirements and Low Fees
This means that fully automated providers charge as little as 0.25 percent; services with human involvement charge around 1 percent. ‘Robo-advisors’ offer much lower minimum investment limits. FinTech algorithms are also completely neutral when it comes to lending and assessing risk for small businesses and individuals. They have incorporated a new investor type to this market thanks to low costs and ease of use.
All this improve the quality of financial services by increasing competition in the industry and creating a more diverse and stable credit scenery.
For traditional wealth managers, however, ‘Robo-advisors’ need not be something to fear. Technology should be an enabler to increase current client relations and to give advisors new chances to start conversations with potential clients, and providing tools that include business assessments and company performance analysis, helping wealth managers to measure the risk score of clients and showing where they are, using the most up-to-date figures.
It is a powerful tool that has already been endorsed by over 80 financial institutions around the world. Last year, Barclays launched its own fin-tech incubator and Santander created a fund to invest in FinTech companies.
The rise of FinTech is ultimately an improvement. It is helping to cut costs and increase the democratization of financial services for the 99% not just the 1%. And this improvement is also a big advantage for SMEs.
FinTech can offer an opportunity for traditional players to enhance their services and remain competitive in a fast transforming environment through improved prospecting and customer care.
Robo advisors can be the perfect investment option for Small Business who are interested in investing but don’t have the capital required by human investment managers.