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Capital market

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A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year,[1][dead link‍] as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties.

Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

Meaning

Capital Market basically means a market in which financial securities are traded between individuals or institutions. It is a very popular means of raising funds for enterprises (both public and private) as well as governments. It is a form of long term funding. This market is inclusive of both Bond and stock markets. Moreover capital markets are composed of a primary as well as a secondary market.[2]

Primary market is defined as the market in which new issues are sold for the first time. Forbes defines it as a market in which new stocks or shares are directly sold to the people who want to invest in the company issuing them. Example IPO.[3]

Secondary market on the other hand is the market in which existing securities are traded.

Role and working

The basic role of capital markets is to help raise funds that are needed by various institutions to finance their various activities such as improving infrastructure, increasing assets, conducting research etc. These markets are also a source of valuable income to investors. They derive income when financial assets increase in value. The increase results in additional income for the investors who then spend some of this income thus boosting sales and contributes to economic growth. Since investors deal with the market on a daily basis and purchase only shares of those companies which they believe are doing well, this market provides companies with valuable insight as to whether their enterprise is perceived by these investors as performing well. Thus capital markets provide valuable feedback to these institutions. Knowledge of stock values also helps in understanding reactions of various investors to changes in Government policies. For example if the government introduces a policy which makes investors believe will cause negative effects to the economy they reduce purchase of stocks which leads to a decline in trade thus resulting in a declining market. Similarly if the policy introduced is perceived as good for the market, trading increases thus leading to rising markets. Capital markets have always been seen as the source of continuous investment funding which plays a major role in helping the economy to grow.[4]

In order for the capital market to function efficiently and smoothly there is a need for free flow of information among all players of the capital market. Unless the investors are updated regularly about how the market is doing, they will not be able to keep track of recent developments or make well informed decisions which will thus affect the true value of stocks. There are numerous ways by which investors can keep themselves updated daily, hourly or even minute by minute. Their sources include the following: 1) Earning reports, detailed annual reports, and proxy statements issued by various companies who are legally mandated to do so. 2) Market pages of various newspapers that help find out the price at which specific stocks were traded at during the previous trading session. 3) Indexes such as Dow Jones Industrial Average (DJIA) that help measure the overall pace of market activity. 4) Magazines and newsletters dealing with stocks and markets provide valuables information about the current market. 5) Certain television programmes give a nonstop news about the movements in stock prices 6) Internet provides minute to minute information about stocks.[5]


Regulatory authorities

See main article List of financial regulatory authorities by country


See also

References

  1. ^ Sullivan, arthur (2003). Economics: Principles in action. Upper Saddle River,: Pearson Prentice Hall. p. 283. ISBN 0-13-063085-3. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)CS1 maint: extra punctuation (link)
  2. ^ market, Capital. "capital markets".
  3. ^ Market, Primary. "Primary market".
  4. ^ "stocks and market".
  5. ^ "stocks and market".
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