Capital market definition, function and types

Capital market definition, function and types

A capital market is a financial type of marketing in which equity securities are bought or sold. Capital markets are there for the long term investors who put their money in governments or even large companies to get a profit over a long period of time. The capital market meaning commonly known is that it is part of a financial system which raises capital through shares, bonds and other long term investments. The capital markets help the financial regulators to govern the investors against fraud. In most cases, coital markets are network-based, that is, people get to trade online. The electronic systems help to govern the overall capital systems. Public capital is a combination of assets that are owned by the government which are used for general productivity. The public capital is the means used in operating the capital market.

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A capital market is very different from a money market. Money markets raise short term finances. An investor in the capital market gains the confidence with their assets because they are secure.

Types of public capital market

Broadly, capital markets are categorized into two; the primary market and the secondary markets.

1. Primary markets

Primary markets are responsible for issuing of recently-developed securities. This market embraces initial public offering(IPO). Mobilization of the funds takes place through right issue, prospectus and private security placement. In the primary markets, the stocks are usually sold to investors via a process known as underwriting. The main entities that normally raise the money in the primary markets are governments, either local or national, or companies and business enterprises. The entities that buy these bonds are hedge funds, sovereign wealth or even people with wealth and would like to invest for long term profits.

2. Secondary markets

The secondary market on the other hand is a market where existing securities are either bought or sold though an over-the-counter exchange or elsewhere. Secondary markets can also be described as markets for all old securities. This means that securities that were previously sold in the primary markets are sold here. Secondary markets are very important because they give the investors on the primary markets willingness to invest. This way, the individuals are able to easily cash out their money if need be.

Global capital market

A global capital market is an interlinked investment exchanges that occur at the international level. The financial securities are bought or sold via the internet. Due to advanced technology, a structured yet informal global capital market has enabled people to make various exchanges. Investors have the opportunity to buy and sell using various currencies. The global capital markets grow as different nations grow, enabling individuals to exchange a lot of money in form of bonds and securities across different borders.

Functions of capital markets

The functions of the capital markets are listed below.

1. A capital market serves as a link between investors and savers

The capital market plays a very important role in linking up the savers and investors. Investors are risk takers, people who risk their assets to gain a profit. A saver in the other hand seeks to preserve their money for future use. A capital market, however, mobilizes these funds and turns savings into investments. Therefore, the capital market surplus or the wastes are turned into productive use. This in turn causes a country to grow economically. A capital market creates a good platform between the investors and savers whereby they get an opportunity to grow their assets.

2. To mobilize savings for long term investments

With the capital markets, investors get to save in the primary market or the secondary market. As stated earlier, the capital markets allow an individual to pull out their money through the secondary market if need arises. So, investors reduce risk, hence having a chance of investing for a long term. Moreover, with the in the capital markets, both banking and non-banking institutions provide the facilities so people are encouraged to save even more. This is why the less developed countries suffer greatly economically because people save on wasteful resources like land. In developed countries people can comfortably invest in other areas and this causes the country to grow tremendously.

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3. Facilitates trading of securities

An investor has an option of buying or selling securities at a profit. A capital market gives the customers an assurance of a long term profit. A capital market also encourages investment in the long run. Investors can also invest in bonds, shares and many more. With the advanced technology, investors get to monitor their assets through the stock exchange, move their assets if necessary and also invest in the areas that seem to have more profit. An investor is normally confident since assets are very secure and in case of a fraud they can get them back. Securities are traded freely and in some cases, it is done internationally.

4. Encourages investments

When more people invest in the capital market, financial institutions increase. So capital becomes mobile and people are in a better position to save because interest rates drop. With lower interest rates people are encouraged to invest. The main aim of a financial market is to increase profits. A capital market does so by ensuring that the financial assets are also unlimited. So individuals have many options to choose from and this encourages them to even save more. The fact that the financial assets are also secure is reason enough to want to save.

5. A capital market minimizes transaction and information cost

A capital market is long term, meaning the transaction costs are minimized. In a money market for example, an investor tends to pay more since its short term in order to stabilize the market. A capital market allows an investor to invest with less costs and this means that it is efficient and effective.

The capital market also stabilizes the stock values and the securities to reduce the fluctuations. This is done by providing money to the borrowers at lower interest rates. In the long run, this reduces the unproductive activities causing minimal waste of money. This also encourages the investors to save and also grow their investments.

6. Promotes economic growth

The capital market does not only reflect the growth of an economy, but also accelerates its growth. This is because the non-bank financial institutions allocate the financial resources rationally depending on the growth of the specific country. This leads to a good allocation of resources which causes a general expansion of industries. This causes a stabilized economy, an economy with a positive growth curve.

7. A capital market gives benefits to the investors

The investors in the capital market have everything to gain and nothing to lose. This is because capital market helps to bring together both buyers and sellers of the securities. Thus, this promotes an increase in market of the investments. So, the investors do not have to seek for market, a capital market gives it to them. The stock market always advertises the prices to the investors. This way, the investors have accurate knowledge of their assets. They are then able to channel their assets into the most profitable terms. Eventually, an investor is given a chance to maximize their profits. The capital market also safeguards the funds. In case of a fraud, they are compensated.

A capital market can either be primary or secondary. In both, the investors get to invest their money which is repaid in the long term basis and get profits. The stock exchange market runs the secondary market. The individuals have a chance of ensuring that their money does not get stolen. A capital market gives individuals a platform to increase their investments and contribute to the growth of the economy. With the advanced technology, things have become better because investors have the opportunity to monitor their activity wherever they are.

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Capital market investment helps to improve the status of individuals living in a country and also the country itself. Most developed countries have kept their economies stable by encouraging these investments. It is also essential to note that in a capital market, an individual has an option of pulling out if they feel the need to. The terms also do not change since the investment is long term. It is therefore very necessary for more people to join the financial markets and reap the benefits in the future.

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Source: Yen Ghana

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