Definition
The Capital Market is a sector of the financial market where long-term debt or equity-backed securities are bought and sold. It channels the wealth of savers to those who can put it to long-term productive use, such as businesses or governments making long-term investments. It primarily includes the stock and bond market.
Key Takeaways
- Capital Market is a platform where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. It helps channelize surplus funds from savers to institutions which then invest in productive business ventures.
- It is divided into primary markets where new securities are issued and secondary markets where existing securities can be bought and sold. The stock and bond market are part of the capital market.
- Capital markets play a crucial role in promoting economic growth by enabling businesses to raise long-term funds. They also provide a venue for investors to achieve higher returns on their surplus funds.
Importance
The finance term “Capital Market” is of significant importance because it provides a platform where entities can raise long-term funds for business ventures while providing investment opportunities to individuals, companies, and governments.
It allows businesses to support and expand their operations, leading to economic growth and job creation.
On the investor’s side, it offers avenues to invest surplus funds and earn returns, contributing to wealth creation.
Moreover, the capital market encourages responsible behavior from companies through regulatory oversight, bringing transparency, minimizing risk, and ensuring the market’s overall stability and confidence.
The effective functioning of the capital market thus plays a crucial role in the health and prosperity of an economy.
Explanation
Capital markets serve a critical purpose in the global financial sector by bringing together individuals and entities who are interested in making long-term investments. Specifically, these markets allow organizations to raise funds to expand their operations or undertake new projects via the sale of securities to investors. The capital market plays a pivotal role in promoting the economic growth and prosperity of a nation by enabling efficient resource allocation among various participants.
The money generated in this market is used for productive purposes such as the procurement of goods, services, and infrastructural development which in turn boosts the economy of a nation. From the perspective of an investor, capital markets offer a platform where they can make investments and potentially earn returns. Capital markets accommodate both risk-averse and risk-taking investors by offering a variety of financial instruments with different risk profiles.
These may range from low-risk treasury bonds to high-risk equities. Also, capital markets boost the overall economy by making investing more accessible and attractive to the general public, thereby fueling greater economic activity. So, capital markets essentially perform a vital function in bringing together savers and borrowers, both directly and indirectly, and providing a market for the exchange of funds.
Examples of Capital Market
New York Stock Exchange (NYSE): The New York Stock Exchange is one of the largest capital markets in the world. Companies from around the globe sell their shares to investors on the NYSE in hopes of raising capital for current operations or future expansion.
Government Bond Market: Governments often issue bonds to finance expenditures such as infrastructure projects. These bonds are sold in the capital market, where investors buy them in hopes of earning a promised interest rate over time. The US Treasury Bond Market is a significant part of the global capital market.
Forex Market: This is the market where currencies are traded. It’s a capital market because individuals, firms, and governments often trade in currencies in order to fund international transactions, operate multinational businesses, or for investment purposes. It plays a crucial role in deciding exchange rates around the world.
FAQ Section: Capital Market
What is a Capital Market?
A capital market is a financial marketplace where buyers and sellers participate in the trade of financial securities like bonds, stocks, etc. It’s a venue where savings and investments are channelled between suppliers who have capital and those who are in need of capital.
What are the types of Capital Market?
Capital markets are divided into two categories: Primary markets, where new securities are issued and sold, and secondary markets, where existing securities are bought and sold.
What is the role of the Capital Market?
Capital markets play a critical role in helping drive economic growth and job creation. They act as a medium of conveying the financial resources from those who save to those who invest in productive channels, fostering the growth of the industrial sector and the economy as a whole.
Who participates in the Capital Market?
Participants in the Capital Market can range from individual investments to large institutional investors such as pension funds and mutual funds. Other participants could be banks, insurance companies, and various financial institutions.
What are the risks associated with Capital Market?
Investing in the capital market comes with risks such as market risk, credit risk, liquidity risk, and operational risk. Investors are advised to thoroughly understand these risks and consult with financial advisors before investing.
Related Entrepreneurship Terms
- Securities
- Stock Exchange
- Initial Public Offering (IPO)
- Bonds
- Investment Banks
Sources for More Information
- Investopedia: A comprehensive online resource for finance and investment information.
- Bloomberg: A global leader in finance news with dedicated sections on equity markets, currency markets, and more.
- The Financial Times: A leading international daily newspaper with a special emphasis on business and economic news internationally.
- Reuters: An international news organization that covers a wide range of financial topics including capital markets.
