Capital Markets

Major Capital Markets

Capital Market is the market where long term securities, debt instruments, shares, and bond are traded.  It is the market where the government and companies raise capital. Government issues bonds and companies issue Initial Public Offers (IPOs) to raise capital from the market. Common investors earn profit and returns by investing in the capital market. Thus, Capital market plays a pivot role in capital formation and growth of any economy. We shall here discuss Major Capital Markets.

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Major Capital Markets

The capital market acts as a channel between investors and investees, borrowers and lenders. It acts as a market where a person having surplus funds invest in the hope of getting higher returns and a person having deficit sells stock and bonds to get finance from the market. The capital market provides long term financing wherein the lock-in period is usually more than one year.

It also offers a spectrum of investment avenues to investors and leads to capital generation in the economy.

It includes two types of market-

  1. Primary Market
  2. Secondary Market

Primary Market

Primary Market is the market where new securities are traded such as IPOs through underwriters or financial institutions and even further public offers.

Features of Primary Market

  1. The companies use this market to expand business or arrange money for working capital requirements.
  2. It performs the functioning of capital formation in the economy.

How to issue securities in the Primary Market?

  1. Initial Public Offers- Initial Public Offer is simply an offer where a company list its securities for the first time and issue it to the common public. It leads to dilution of ownership of the company. A company raises funds from the common public to expand or diversify the business.
  2. Private Placement- In this issue, the company sells shares to brokers or financial institutions who subsequently sells shares to selected clients at a higher price. This is a cheaper way to raise capital than the initial public offer.
  3. Right Issues- The existing companies bring out the Right issues. Right to obtain shares is given to existing shareholders. They have the right to accept the offer or assign in favor of some other person.

Key Players in Primary Market

  1. Companies- The companies which require capital to grow and expand their business.
  2. Underwriters and Institutions- They provide capital to companies that need money to grow.
  3. Investment Bank- They connect companies to institutions and facilitate deals between them.

Examples of Top Investment Banks

  • Goldman Sachs
  • Credit Suisse
  • Morgan Stanley
  • HSBC

Major Capital Markets

Source: freepik.com

Secondary Market

Secondary Market is the market where existing securities are traded during trading days and trading time specified by exchanges. Exchanges such as NASDAQ, National Stock Exchange of India, Bombay Stock Exchange of India, American Stock Exchange provides a centralized and liquid secondary market for investors to invest.

Features of Secondary Market

  1. The secondary market provides transparency in prices of securities and is strictly regulated.
  2. It promotes liquidity, disinvestment, and reinvestment in different sections of the economy.

Key players in the Secondary Market

  1. Buyers and Sellers- Secondary market offers buyers and sellers a platform to trade in securities through a central place like a stock exchange.
  2. Investment Banks- Investment Banks provide research and analysis on securities to help investors take a decision on their securities.

Once security has traded on the primary market, it will open up for trading for smaller investors in the secondary market.

Practice Questions for Major Capital Markets

Which of the following instruments are tradable in the capital market?

  1. Debt Instruments.
  2. Equities and Preference Shares.
  3. Derivatives.
  4. All of the above

Ans. All of the above

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