Capital markets are financial markets for long-term financial instruments. New York Stock Exchange, NASDAQ Stock Market, Tokyo Stock Exchange, Shanghai Stock Exchange, Hong Kong Stock Exchange, Euronext, London Stock Exchange, are among the top examples. Investors stocks and debt in this market.
Through this market, businesses raise funds to finance their capital investment. Money comes from various investors such as pension funds, insurance companies, hedge funds, asset managers, and even individuals.
Capital market instruments
Two broad category instruments are debt securities and stock securities. Debt instruments represent liabilities, while stocks represent ownership.
But, from the two instruments, there are many variations, such as government bonds, corporate bonds, medium-term notes, exchange-traded funds, and mutual funds.
Is the capital market the same as the financial market?
The capital market is one of two types of financial markets. Others are financial markets. Both form what we call financial markets.
Both are different in terms of the orientation of the use of funds. Financial markets facilitate short-term funding needs, while capital markets are long-term. Examples of instruments in the money market are treasury bills, commercial paper, bankers’ acceptances, certificates of deposit, repurchase agreements, and bills of exchange.
Companies, for example, use funds from the money market for operational costs and to meet liquidity, for example, to pay customers or employees. Meanwhile, they raise funds from the capital market for investment in EIA assets (such as buying machinery or building factories), which are expected to generate economic benefits of more than one year
How the capital market works
It’s just that capital market trading does not trade goods but proof of ownership or liability, which at present is mostly paperless.
Demand-supply of funds meets and transact in the capital market. Companies and governments represent the demand side. They need funds for investment.
Meanwhile, investors represent suppliers of funds. Various types of investors are in the capital market, including individuals, insurance companies, pension funds, banks, and foundations.
For instance, when a company needs to build a new factory and has a little internal capacity, it can raise money from the capital market. The company then issues shares or debt securities.
When investors buy bonds or shares, money moves from investors to the company. As compensation, investors obtain ownership (stocks) or claims (debt securities) of the company’s assets.
For stock investors, the potential return comes from dividends and the potential profit from rising stock selling prices (capital gains). Meanwhile, for bond investors, they potentially receive periodic coupons and also capital gains.
Today, trade is almost always hosted on a computer-based electronic trading platform. Various private companies also provide browser-based platforms, which allow individuals to buy shares in the secondary market.
The capital market facilitates a more efficient demand-supply of funds in the economy. It finds investors who have funds and companies that need funds. In the secondary market, securities holders can trade with each other at market prices.
The capital market supports a more efficient capital allocation in the economy, facilitating a country’s economic growth. Through the capital market, savers channel their wealth to those who can use it for long-term productive use, such as companies or governments. As compensation, they receive returns in the form of dividends, capital gains, and coupons.
The company uses these funds to increase production capacity. Capital investment usually requires significant funds, which often cannot be met with internal cash. Therefore, the capital market is a good option for collecting. That way, the company’s financial performance is not overburdened as well as the company can seize opportunities for long-term growth.