What is the capital market?
What is a capital market and how does it work? Looking for a simple capital market definition? We’ve got you covered.
What is the capital market?
The capital market definition refers to a broad spectrum of tradable assets, including the stock market, the bond market, the foreign exchange market as well as other venues used for trading various financial products. It allows investors, companies, banking institutions and governments to trade stocks, bonds and other instruments, either publicly or privately. Capital markets seek to improve transactional efficiencies.
The stocks and bonds in the capital market are medium-to-long-term, meaning the investment is typically secured for more than a year. As stocks are used extensively by companies as a means of raising the necessary capital, a capital market meaning is that of a venue where savings and investments are channelled between the suppliers who hold capital and those seeking capital.
Where have you heard about capital markets?
As “capital market” is an overarching term, you’re probably more familiar with specific market names, such as the London Stock Exchange or the New York Stock Exchange.
Capital markets play a significant part in economics as they supply funding for long-term investment and improvement, which contributes to economic growth.
What you need to know about capital markets...
Apart from bonds and stocks, capital markets may involve trading of other financial securities, including derivative contracts, such as options, various loans and other debt instruments, and commodity futures.
Some capital markets are available to the public directly while others are closed to everyone except large institutional investors. Private trading, mostly between large institutions with high-volume trades, occurs via secured computer networks at very high speeds. Both stock and bond markets make up a very significant portion of the total volume of capital market trades.
Capital markets are composed of primary and secondary markets. The majority of modern primary and secondary markets are computer-based electronic platforms.
The primary markets are the ones where newly issued stocks and bonds are traded. These are used by companies and governments to raise funds: investors buy directly from the issuer. Governments issue only bonds, whereas companies often issue both bonds and equity.
These securities are known as primary offerings or initial public offerings (IPOs). When a company goes public, it sells its stocks and bonds to large-scale and institutional investors, such as mutual funds, hedge funds, pension funds and sovereign wealth funds.
The secondary markets, on the other hand, are the ones where existing stocks and bonds are traded. The variety of offered assets is much wider here. Issuing companies do not have a part in the secondary market.
Existing securities are traded among investors, usually on an exchange, over-the-counter or elsewhere. The Hong Kong Stock Exchange and Nasdaq are examples of the secondary market.
Although stocks and bonds are sold in both markets, the secondary market is the one that is most commonly known as the “stock market.”
Capital markets are supervised by financial regulators, such as the US Securities and Exchange Commission and the Bank of England.
Today, capital markets are a crucial, integral part of a functioning modern economy as they provide the opportunity to transfer money from the people who have it to those who need it for productive use.