What Are Capital Markets And Types Of Capital Markets?

What Are Capital Markets?

Capital markets are where savings and investments are made between service providers and those in need. Suppliers are people or institutions that have capital to lend or invest and usually include banks and investors. The people seeking capital in this market are companies, governments, and individuals. They seek to improve the efficiency of transactions by bringing together suppliers and seekers of capital and providing a place where they can exchange securities.

KEY TAKEAWAYS

Capital markets refer to the places where money is exchanged between suppliers and those seeking capital for their own use.
In the capital markets, the suppliers are usually banks and investors, while the seekers of capital are companies, governments and individuals.
Capital markets are used to sell a variety of financial instruments, including stocks and debt securities.
These markets fall into two categories: primary and secondary markets.
The most popular capital markets include the stock market and the bond markets.

Understanding Capital Markets

The term capital market is a broad term used to describe the physical and digital spaces in which different institutions trade different types of financial instruments. These venues may include the stock market, bond market, currency and foreign exchange (Forex) markets. Most of the markets are concentrated in major financial centers such as New York, London, Singapore and Hong Kong.

Capital markets include households (through savings accounts they maintain in banks) as well as pension and retirement funds, life insurance companies, charities, and non-financial corporations that generate excess cash. Consumers of money distributed in capital markets include home and car buyers, non-financial corporations, and governments that finance infrastructure investments and operating costs.

Capital markets are mainly used to sell financial products such as stocks and debt securities. Debt securities, like bonds, are interest-bearing debt securities.

These markets fall into two different categories:

Primary markets are where new stock and bond issues are sold to investors.
Secondary markets are where these previously issued securities are traded among investors.

Important:

Capital markets are an important part of an efficient modern economy because they move money from those who own it to those who need it for productive use.

Primary Markets Vs Secondary Markets

Primary Markets

When a company sells new stock or bond publicly for the first time, such as in an initial public offering (IPO), it does so on the underlying capital market. This market is sometimes called the new releases market. When investors buy securities in the primary capital market, the company hires an insurance company to evaluate the securities it offers and prepares a prospectus detailing the price of the securities to be issued with other details.

All primary market issues are under strict regulation. Companies must file statements with the Securities and Exchange Commission (SEC) and other securities agencies, and must wait for approval of their files before making them public.

Small investors are often unable to purchase securities in the primary market because the company and its investment bankers want to sell all available securities in a short period of time to meet the required volume, and they must focus on marketing the sale to large investors. to give. Who can buy more securities at once. Sales marketing to investors often includes road shows or dog-and-pony shows, where investment bankers and company leadership meet potential investors and convince them of the value of the security being issued.

Secondary Market

The secondary market includes places supervised by a regulatory body such as the Securities and Exchange Commission where these previously issued securities are traded among investors. Exporting companies do not have a share in the secondary market.

There are two different secondary market categories: auction and merchant market. The auction market is home to an open cry system where buyers and sellers gather in one place and announce the prices at which they are willing to buy and sell their securities. NYSE is one such example. In merchant markets, people trade over an electronic network. Most small investors trade through dealer markets.

Are Capital Markets the Same as Financial Markets?

Although there is sometimes a great deal of overlap, there are some basic differences between the two terms. Financial markets include a wide range of places where individuals and institutions exchange assets, securities, and contracts with each other, and they are often secondary markets. On the other hand, capital markets are mainly used to raise funds, usually for a company, for use in operations, or for growth.

What Is the Primary Market Vs the Secondary Market?

New capital is raised through shares and bonds which are issued and sold to investors in the primary capital market, while later the traders and investors buy and sell these securities among themselves in the secondary capital market, but where the company does not receive any new capital.

What Markets Do Companies Use to Raise Capital?

Companies that raise equity capital may seek private placements through angel investors or venture capital investors, but most raise money through an initial public offering, when shares are publicly listed on the stock market for the first time. Debt capital can be increased through bank loans or securities issued in the bond market.

Bottom Line

Capital Markets combine those who provide capital with those who seek it for their own purposes. This can include governments looking to fund infrastructure projects, businesses looking to expand and even individuals looking to buy a home. It is divided into two different categories: the primary market, where companies list new issues for the first time, and the secondary market, which allows investors to purchase previously issued securities. The main advantage of these markets is that they allow money to move from those who have it to those who need it for their own purposes.