Capital Markets Defined

Cite this article as:"Capital Markets Defined," in The Business Professor, updated December 12, 2018, last accessed June 1, 2020, https://thebusinessprofessor.com/lesson/capital-markets-defined/.

Back to: ECONOMICS, FINANCE, & ACCOUNTING

Capital Markets Explained

A capital market is a type of financial market for the purchase-sale of securities, such as stocks, bonds, and long-term debt securities. It allows companies to place their securities with a large number of investors for the purpose of financing working capital and the expansion of the company.

A Little More on Capital Markets

Characteristics of the capital markets:

  • When the investor purchases securities (shares) of the company, he becomes an owner of the company in proportion to the capital he owns.
  • Capital markets add “liquidity”, making it is relatively easy to buy and sell securities.
  • Capital markets add to the volatility in the prices of the securities.
  • There is no guarantee of obtaining benefits for purchasing or selling securities.
  • There is no specific term/period for the purchase-sale of securities, and each one chooses when to buy or sell.

Benefits and objectives of the capital markets include:

  • It can result in profits in the short and long term.
  • It allows for diversifying the risk in the investment portfolio.
  • It allows legal and secure access to the best companies in the world.
  • It allows companies to obtain financing for operations.
  • It offers a wide range of products with different associated levels of risk according to the investment or financing needs of market participants.
  • It reduces the costs of selection of and allocation of resources to productive activities.

Capital markets can be classified according to different criteria:

  • The assets traded in them.
  • According to its structure
  • Organized market: that official market, regulated and supervised.
  • OTC Market (Over The Counter) – Where the negotiation is done directly between the parties, presents a greater risk.
  • Based on the time
    • Primary or issue market: Where the securities issued are transmitted for the first time.
    • Secondary market: Where the successive purchase-sales of securities already issued in the primary market are made.

References for Capital Markets

http://www.businessdictionary.com/definition/capital-market.html
https://www.investopedia.com/terms/c/capitalmarkets.asp
https://en.wikipedia.org/wiki/Capital_market
https://investinganswers.com/financial-dictionary/investing/capital-markets-1429

Was this article helpful?