Capital Markets

Financial Dictionary -> Investing -> Capital Markets

Capital markets refer to markets for long-term financial products and services where governments and companies can raise financing. Although these products may have similarities with money market instruments, the main difference lies in their maturity. On a capital market, funding is provided for a period of one or more years while money markets offer short-term financing. There are two types of capital markets: primary and secondary. In the first type, new bond and stock issues are sold through underwriting. With the second type, traders and investors buy existing securities, typically over the counter, on securities exchanges, or other places.

Examples of Capital Market Instruments

Since money involved in a capital market is large in volume (ranging from a few thousand dollars to millions), it is regulated by the US Securities and Exchange Commission or SEC, protecting investors from fraud and other related negative occurrences. Unlike the banking industry, capital markets are not subject to federal regulations. Disclosure of financial information and other relevant documentation is mandated by SEC as to minimize fraud and insider trading. Large institutions as well as companies have access to some basic facts about the entities they invest in. The Securities Act of 1933, also known as the 1933 Act, the Federal Securities Act, and Truth in Securities Act, requires information disclosure on securities offerings as to increase the level of trust in capital markets. Other regulatory bodies act in different countries such as Securities and Exchange Board of India, China Securities Regulatory Commission, Australian Securities and Investments Commission, etc.

Capital market instruments used for market trade include stocks and bonds, treasury bills, foreign exchange, fixed deposits, debentures, etc. As they involve debts and equity securities, the instruments are also called securities, and the market is referred to as securities market.

Stocks are traded by companies for the purpose of fund raising. The purchase of stocks makes the buyer a co-owner of the company, thus giving him a voice in the decision making process. Bonds are also securities which companies use to raise long term financing. In fact, this financial instrument is a form of debt to be repaid with interest at the maturity date.

Investors can make good money by investing in stocks and bonds, but the risks are higher compared to other financial instruments on the capital market. Treasury bills and debentures offer more security than other instruments, but they come with less return to the investor. While products vary in terms of return on investment, all of them are intended to provide benefits if handled carefully.

Working with Capital Markets

For companies, governments, and other entities, the capital market provides an ideal environment for the development of strategies that can yield long-term funding. As with other markets, this one involves the buying and selling of financial instruments to gain profit. Brokerage firms and stock exchanges are some of the players involved in capital markets. Transactions are usually carried out with the help of brokers who act as middlemen between the buyers and sellers. However, some instruments, such as bonds, are traded over the counter.

Because the capital market structure is very broad, different types of investors have the opportunity to develop financial strategies that bring profits and help strengthen the economy of a given country. Some individuals take more risk in investing in as many diverse investment instruments that yield a greater profit in return.