CAPITAL MARKET
A capital market is a place that allows the trading of funding instruments such as shares, debentures, debt instruments, bonds, ETFs, etc. It is a source for raising funds for individuals, firms, and governments.
A capital market assists an economy by providing a platform to gain funds for business operations, development activities, or wealth enhancement. The functioning of a capital market follows the theory of the circular flow of money.
TYPES OF CAPITAL MARKET
- PRIMARY MARKET
The primary market is for trading freshly issued securities, i.e., first-time trading. It enables an initial public offering. It is also known as the new issues market.
- SECONDARY MARKET
The trading of old securities occurs in the secondary market, which occurs after transacting in the primary market. Both stock markets and over-the-counter trades come under the secondary market. We also call this market the stock market or aftermarket.
FUNCTION OF CAPITAL MARKET
- It mobilizes parties’ savings from cash and other forms to financial markets. It bridges the gap between people who supply capital and people in need of money.
- Any initiative requires cash to materialize. Financial markets are central to national and economic development as they provide rich sources of funds.
- For the participants, the exchange instruments possess liquidity, i.e., they can be converted into cash and cash equivalents.
- Also, the trading of securities becomes easier for investors and companies. It helps minimize transaction and information costs.
- With higher risks, investors can gain more profits. However, there are many products for those with a low-risk appetite. In addition, there are some tax benefits obtained from investing in the stock market.
- Usually, the market securities can work as collateral for getting loans from banks and financial institutions.