“Capital Markets Explained”

 

You can view capital markets as being the place where different entities – like investors, institutions, and governments – come together to trade long-term financial instruments. The meaning behind these markets, however, is a lot broader than that. If you take a deeper look into the “capital markets” term, you will find no shortage of intricacy.

 

What are they?

 

Capital markets are the exchange system platform that is dedicated to transferring capital. Specifically, from investors looking to utilize their surplus capital for businesses requiring the capital in order to finance investments or projects.

 

For the most part, capital markets feature two types of securities: equity securities and debt securities. These are both forms of investments that provide investors with an array of returns and risks. Moreover, they offer capital with different obligations to users.

 

  • Equity: Equity securities are basically the ownership shares of a business or venture. They are typically traded on the stock market.
  • Debt: Debt securities are, at their core, IOUs that come in the form of either bonds or notes. They are usually traded on the bond market.

 

Capital markets often trade in other financial securities. These include bonds, derivative contracts (i.e. options, various types of loans, and other debt instruments), and commodity futures. Other financial instruments can be sold in capital markets. In fact, many of these products are gradually becoming more complex.

 

Certain capital markets are directly available to the public, whereas others are exclusively for large institutional investors. Private trades between large institutions with high-volume trades occur rapidly via highly secured computer networks.

 

Primary vs. Secondary

 

Generally speaking, capital markets are made up of primary and secondary markets. Most primary and secondary markets of the modern era are electronic platforms that are computer-based.

 

Primary markets are open to investors who are looking to directly purchase securities from the issuing company. These securities are seen as primary offerings or initial public offerings (IPOs). After going public, a company will sell its stocks and bonds to institutional investors of a larger scale, such as mutual funds and hedge funds.

 

On the other hand, the secondary market includes venues managed by a regulatory entity like the Securities and Exchange Commission (SEC). Here, existing securities or securities that have already been issued are traded between investors. Issuing companies do not play a role in the secondary market.

 

Stock Market: what’s the difference?

 

If you go by the names alone, it is easy to assume that the stock market and capital markets are the same thing. Capital market refers to a broad range of tradable assets including the stock market and other venues for trading an array of financial products. The stock market permits stock trading between investors and banking institutions, whether it be public or private.

 

Stocks are defined as being financial instruments that represent the partial ownership of a company. These important documents are frequently used by companies to raise capital. The stock market contains the aforementioned primary and secondary markets, which trade among banks that insure stock and public investors who are trading stock, respectively.