Capital market is one of the types of markets that savers and economic enterprises exchange with each other for the long term. For example, savers exchange with the aim of earning profit and financial investment, and economic enterprises issue securities with the aim of financing and sell them to savers.
Capital market consists of primary market and secondary market. The primary market deals with the trading of securities and the secondary market deals with the exchange of issued securities.
Purpose of Capital Markets
Capital markets improve transactions. In this market, those who own capital and those who are looking for capital gather together and provide a place for economic persons to exchange securities.
Types of Capital Markets
1. Stock Securities
Stock securities are traded on the stock exchange. Equity securities are ownership of a business or investment. When we own a company’s stock, we own a part of that company and we own the income that the company will earn in the future.
2. Debt Securities
Debt securities are traded in the bond market in the form of bonds and notes.Debt securities represent the borrowing of money that is paid with interest on the maturity date. Borrowers take money, use it in financing, and repay the money as specified interest on a specified date.
Securities are bought and sold in two types of markets.
1. Main Market
when the company issues securities in exchange for capital.
2. Secondary Market
when security holders trade with other investors in a transaction separate from the issuing company.
Advantages of the Capital Market
- Facilitates the movement of capital for greater use, profitability and productivity to increase revenue.
- Strengthens economic growth.
- Savings to finance long-term investments.
- Facilitates securities trading.
- Minimizing transaction costs.
- Promotion of information transparency.
- Quick evaluation of financial instruments.
- Provides insurance against price market threats through trading.
- Makes settlement of transactions easy.
- Improving the effectiveness of capital allocation.
- Funding availability.
Capital Market Products
– Stock Exchange
– Debt Bonds
– Foreign Currency
Capital Market Effects
In these markets, unused funds are used for investment.
Capital markets become available and investors can buy and sell.
By facilitating the market, the capital market makes conditions easier for borrowers and lenders. Businesses in need of loans and capital enter the capital market and apply for loans in exchange for issuing debt securities.
Liquidity of Capital
Capital markets make it easy for those who have invested to sell their assets to someone else in exchange for cash. If we want to sell the asset at the market price there is almost always a buyer that allows us to convert the asset into cash.
One of the main functions of the capital market is to ensure the accurate price of the asset. A stock’s price may rise quickly on news or react badly to the next report.
Return on Investment
Capital markets provide an opportunity for investors to increase their performance in wealth. The capital market gives investors the opportunity to have a higher rate of return.
Partnership bonds are for businesses that borrow money against bonds at a fixed interest rate. In these bonds, short-term bonds with maturities of five years or less are offered.
Junk bonds offer higher returns. For this reason, the companies that issue these bonds are either small, or not reliable, and there is a possibility of investment return.
Foreign bonds are issued by the foreign entity in local currency. For example, an Indian company may attract some capital in America. Because it is not able to attract capital in the capital market in India. It may issue $1 million foreign bonds denominated in US dollars. The debt is repayable in US dollars.
Up To Sum
In this article, we learned about the concept and types of capital market. Capital markets are traded with two types of securities, which include stocks and debt securities. Manufacturing and commercial companies can expand the capital they need to support their activities by issuing each of these bonds in the market. Each of these papers has its own terms and conditions, which we mentioned in this article.