Capital Markets
What Do you mean by capital markets?
Capital markets are financial
markets that bring buyers and sellers together to trade stocks, bonds,
currencies, and other financial assets. Capital markets include the stock market and the
bond market. They help people with ideas become entrepreneurs and help small
businesses grow into big companies, the
capital market allows investors to invest in a company's future growth, and
companies to raise funds for expansion, research, and development. The capital
market is important because it provides liquidity to investors and companies,
allowing them to access funds when they need them. It also helps to allocate
financial resources to the most productive sectors of the economy. Capital market trades mostly in long-term securities. The magnitude of
a nation’s capital markets is directly interconnected to the size of its
economy which means that ripples in one corner can cause major waves somewhere
else. It is a place where
buyers and sellers indulge in trade (buying/selling) of financial securities
like bonds, stocks, etc. The trading is undertaken by participants such as
individuals and institutions.
What are the 2 types of
capital markets?
Types of Capital Market
The capital market consists of two types Primary and Secondary.
- Primary Market
The primary
market is the market for new shares or securities. A primary market is one in
which a company issues new securities in exchange for cash from an investor
(buyer). It deals with the trade of new issues of stocks and other securities
sold to investors.
- Secondary Market
Secondary
market deals with the exchange of prevailing or previously-issued securities
among investors. Once new securities have been sold in the primary market, an
efficient manner must exist for their resale. Secondary markets give investors
the means to resell/ trade existing securities. Another important division in
the capital market is made based on the nature of the security sold or
bought, i.e. stock market and bond market.
What are the 4 capital markets Instruments?
The term capital market includes
Equity
market
This market involves the buying and selling of
company shares, also known as stocks or equities. Equity markets provide
companies with a way to raise capital by selling ownership stakes in the
company to investors. Investors can then profit from their investment if the
company's share price increases. Equity consists of funds that shareholders
invest in a company plus a certain amount of profit earned by them that is
retained by the company for further growth and expansion. Equity is a primary
asset class when it comes to investing and diversifying one’s portfolio.
Additionally, derivatives allow equity to diversify beyond just shares into
securities such as bonds, commodities, and currencies.
Debt market
The debt market, also known as the bond
market, is where companies and governments issue debt securities, such as
bonds, to raise capital. Investors purchase these bonds, which represent a loan
to the issuer, and receive interest payments on the principal until the bond
matures, at which point they receive the principal back. The debt market is an
important component of the global financial system, as it provides a means for
entities to raise capital and for investors to earn a return on their
investments. It also plays a key role in the economy by influencing borrowing
costs for businesses and governments, which in turn can impact economic growth
and stability.
- Bonds
Bonds are fixed-income instruments that are primarily issued by the center and state governments, municipalities, and even companies for financing infrastructural development or other types of projects.
- Debentures:
Debentures are unsecured investment options unlike bonds and they are not backed by any collateral.
Derivatives
market
Derivatives are financial contracts that
derive their value from an underlying asset. These could be stocks, indices,
commodities, currencies, exchange rates, or the rate of interest. These
financial instruments help you make profits by betting on the future value of
the underlying asset. So, their value is derived from that of the underlying
asset. This is why they are called ‘Derivatives’ This market deals with
financial instruments whose value is based on an underlying asset, such as
stocks, bonds, commodities, or currencies. Derivatives can be used to manage
risk or speculate on future market movements.
- Forward: A forward is a contract between two parties in which the exchange occurs at the end of the contract at a particular price.
- Future: A future is a derivative transaction that involves the exchange of derivatives on a determined future date at a predetermined price.
- Options: An option is an agreement between two parties in which the buyer has the right to purchase or sell a particular number of derivatives at a particular price for a particular period of time.
- Interest Rate Swap: An interest rate swap is an agreement between two parties that involves the swapping of interest rates where both parties agree to pay each other interest rates on their loans in different currencies, options, and swaps.
Foreign
exchange market
This market
involves the buying and selling of currencies. It is an institution for the
exchange of one country's currency with that of another country. Foreign
exchange markets are actually made up of many different markets because the
trade between individual currencies enables businesses to conduct international
trade and allows investors to speculate on currency exchange rates. The foreign
exchange market is the largest and most liquid market in the world.
What are
the Functions of the Capital Market?
The main
functions of the capital market are:
- The capital market acts as the link between investors and savers.
- Reduces transaction and data costs.
- Helps in quick valuations of financial instruments.
- Offers to hedge against market risks through derivative trading,
- Helps in facilitating transaction settlement.
- Improves the effectiveness of period location.
- Provides continuous availability of funds to the firms and government that
- Helps in facilitating the movement of capital to productive areas to boost national income.
- Boosts economic growth.
- Helps in the mobilization of savings for financing long-term investments.
- Facilitates the trading of securities.
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