What is Capital Market?
Capital market is a broad term for a platform where financial instruments such as stocks, bonds, ETFs, and other debt and equity securities are traded.
It is an avenue for individual investors, businesses, and governments to raise funds.
In this article:
- Why Capital Markets are Important
- Types of Capital Market
- Capital Market Examples
- Capital Market Instruments
- Components of Capital Market
- Capital market and Money market
Why Capital Markets are Important
Capital markets play an important role in providing companies and governments with a way to raise money for investment and growth.
Companies can issue stocks and bonds to finance new projects or expand their operations, while governments can issue bonds to fund infrastructure projects or other initiatives.
Capital markets are typically divided into two main categories: primary markets and secondary markets.
Types of Capital Market
Primary capital market
Primary markets are where securities are created. Companies sell new stocks and bonds to the public for the first time on the primary market, i.e., through an initial public offering (IPO). An initial public offering (IPO) happens when a private company first releases stock to the general public.
In the primary market, new securities are issued and sold to investors for the first time.
Secondary capital market
This is where investors can trade securities with other investors, such as buying or selling stocks or bonds on an exchange like the Nigerian Exchange Group (NGX), The New York Stock Exchange (NYSE), the Nasdaq, and other international exchanges.
For instance, if you want to buy Amazon (AMZN) stock, you will only be dealing with other investors who also hold Amazon shares. The transaction does not directly involve Amazon.
In the secondary market, securities that have already been issued are bought and sold among investors.
Capital Market Examples
1. Stock market
A stock market is a public market where stocks and other securities are bought and sold. It provides a platform for companies to issue shares to raise capital, and for investors to buy and sell shares for profit.
Public companies are listed on stock exchanges and they must conform to the exchange’s listing rules to maintain their listing. One of the requirements includes submitting audited financial statements to the SEC regularly to maintain status as a public company.
Learn more: What is the Stock Market?
2. Bond market
The bond market is a market where companies, governments, and other institutions can issue and trade debt securities.
Treasury bonds, bills, and notes that the federal government issues trade on the secondary market to raise funds—and because the government’s sizable tax collection backs them, bonds are considered secure investments.
Learn more: What Are Bonds and How To Invest In Them?
3. Currency market
Currency market is the same as the Forex market. The Forex market is a global market where currencies are bought and sold. It allows companies and investors to exchange one currency for another, and to take advantage of the fluctuations in exchange rates.
Since currencies don’t move much, forex trading frequently uses a lot of leverage. This can result in significant gains or losses. Businesses can use the currency market to hedge against losing money on otherwise beneficial deals.
Learn more: Forex Trading for Beginners
4. Derivates market
The derivatives market is a market where financial instruments, such as options, futures, and swaps, are bought and sold. These instruments are used to manage risk, speculate on future market movements, or lock in prices for future transactions.
A derivative is a security whose price is generated from or dependent on one or more underlying assets.
Learn more: Financial Derivatives
5. Commodities market
The commodities market is a market where raw materials, such as gold, oil, and agricultural products, are bought and sold. It provides a platform for producers and consumers of these commodities to manage their price risks, and for investors to speculate on future price movements.
Learn more: Commodity Trading In Nigeria
Capital Market Instruments
Capital market instruments are the types of financial products that are traded on capital markets. They include:
- Stocks
- Bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Options
- Futures
- Derivatives
- Commercial paper
- Treasury bills
- Certificates of deposit (CDs)
Components of Capital Market
Here are various components that make up capital markets:
- Securities exchanges: These are marketplaces where stocks, bonds, and other securities are traded.
- Investment banks: These institutions help companies and governments to issue new securities, and also assist in mergers and acquisitions.
- Brokerage firms: These companies provide a platform for investors to buy and sell securities, and also offer services such as research and investment advice.
- Securities regulators: These organizations are responsible for ensuring that the capital market operates in a fair and transparent manner and that investors are protected from fraud and other abuses.
- Clearing and settlement systems: These systems ensure that securities transactions are processed efficiently and accurately and that ownership of securities is properly recorded.
- Investors: The individuals, companies, and institutions that buy and sell securities in the capital market, with the aim of earning a return on their investment.
Capital market and Money market
The money market is part of the financial market where short-term borrowing can be issued. Assets that deal with short-term borrowing, lending, purchasing, and selling are part of this market.
Capital market enables long-term securities trading backed by debt and equity. Investors or businesses with substantial sums of money can engage in long-term borrowing or lending.
The primary difference between capital market and money market is the duration of the instruments traded. The money market deals with short-term debt instruments, while the capital market trades long-term securities.
How does the capital market help you as an investor?
Capital markets allow investors to buy and sell stocks and bonds and give companies a way to raise money to expand. Because of the trustworthiness and regulation of the capital market, businesses face lower risks and cost when acquiring financial resources.
Other ways the capital market can help investors include diversification, long-term investments, liquidity, transparency, and potential for high returns, amongst others.
