Capital Market

Updated on April 8, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What are Capital Markets?

A capital market is a place that allows the trading of funding instruments such as shares, debentures, debt instruments, bonds, ETFs, etc. It is a source for raising funds for individuals, firms, and governments.

The securities exchanged here would typically be a long-term investmentLong-term InvestmentLong Term Investments are financial instruments such as stocks, bonds, cash, or real estate assets that a company intends to hold for more than 365 days in order to maximize profits and are reported on the asset side of the balance sheet under the heading non-current assets.read more with over a year lock-in period. On the other hand, short-term investmentsShort-term InvestmentsShort term investments are those financial instruments which can be easily converted into cash in the next three to twelve months and are classified as current assets on the balance sheet. Most companies opt for such investments and park excess cash due to liquidity and solvency reasons.read more are usually found in the money marketMoney MarketThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more.

Key Takeaways

Capital Market

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How Does a Capital Market Work?

A capital market assists an economy by providing a platform to gain funds for business operations, development activities, or wealth enhancement. The functioning of a capital market follows the theory of the circular flow of money.

For example, a firm needs money for business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more and usually borrows it from households or individuals. In the capital market, the money from individual investors or households is invested in a firm’s shares or bonds. In return, investors gain profits as well as goods and services.

The market comprises suppliers and buyers of finance, along with trading instruments and mechanisms. There are also regulatory bodies. Stock exchanges, equity marketsEquity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more, debt markets, options markets, etc., are some capital market examples.

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Money Market and Capital Market Video Explanation

Types of Capital Market

Types of Capital Market

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#1 – Primary Market

The primary market is for trading freshly issued securities, i.e., first-time trading. It enables an initial public offering. It is also known as the new issues market.

Here, companies raise funds with the help of preferential allotment, rights issueRights IssueThe term "right issue of shares" refers to the offering of shares to all existing Equity or Preference shareholders of the Company in proportion to their current shareholding in the Company.read more, electronic IPOs, or the pre-selected issue of securities or private placementPrivate PlacementPrivate placement of shares refers to the sale of shares of the company to the investors and institutions selected by the company, which generally includes banks, mutual fund companies, wealthy individual investors, insurance companies.read more. Usually, like an investment bank, the intermediary attaches an initial price to the shares. Once the sale materializes, firms take their shares to the stock exchange to facilitate trading between different investors.

#2 – Secondary Market

The trading of old securities occurs in the secondary market, which occurs after transacting in the primary market. Both stock markets and over-the-counter trades come under the secondary market. We also call this market the stock market or aftermarket.

Examples of secondary markets are the London Stock Exchange, the New York Stock Exchange, NASDAQ, etc.

Elements of a Capital Market

Functions of Capital Market

Downsides

FAQs

Are capital markets efficient?

Most markets are not perfectly efficient. The capital market is no exception, but to some extent, the prices of securities reflect that they have incorporated the current information in the market.

What is a capital market, and examples?

A capital market is where individuals and firms borrow funds using shares, bonds, debentures, debt instruments, etc. The most common example is a stock exchange such as NASDAQ, trading shares from different companies amongst investors.

What are the types of capital markets?

They are of two types –
• Primary market – deals with fresh stocks.
• Secondary market – trading with old securities.

Recommended Articles

This article has been a guide to the capital market and its meaning. Here we discuss its functions, types of capital markets, and advantages and disadvantages. You can learn more about financing from the following articles –

Reader Interactions

Comments

  1. Hadiyona says

    Thanks for this piece, it really helped me.

  2. Abdul Azim says

    To good

    Thanks!!

    • Dheeraj Vaidya says

      Thanks for your kind words!

  3. Alhassan Khadijat says

    Well, capital market seems to have many advantages such as : it helps in the economic growth, help to provide a better future for all through the stock market, and lastly, it helps to provide money to those who want to start a business.

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