An equity market widens the options to savers by offering high-return, high-risk financial assets. By competing for funds with the rest of the financial sector, it may increase the total supply of savings. In addition, it improves the allocative efficiency of the financial sector by giving firms greater access to risk finance, brings a new element of competition to the financial sector and thus provides firms with an alternative to long-term borrowing, and improves the flow of financial information. For an equity market to work properly, rules on trading, intermediation, information disclosure and takeovers need to be clear. The investing public needs to be protected from stock market manipulation, and brokers and underwriters need to follow professional codes of conduct.
A capital market depends on the health of the economy. A well-developed banking system and macro-economic stability are preconditions for its growth. In addition, government can avoid discriminating against the development of an equity market by taxing dividends and capital gains on equity at the same rate as the returns on other financial investments.