What is Capital Market?
CAPITAL MARKET
A capital market is a financial market where buyers and sellers engage in the trade of financial securities, such as stocks and bonds, to raise capital for various purposes. It serves as a platform for companies, governments, and other entities to raise long-term funds by issuing equity or debt securities. Capital markets play a crucial role in the economy by facilitating the efficient allocation of resources, providing investment opportunities, and enabling economic growth.
Types of Capital Markets
Primary Market
Description: The primary market is where new securities are issued and sold for the first time. Companies and governments raise capital by issuing new stocks or bonds.
Example: An Initial Public Offering (IPO) is a common example, where a company sells its shares to the public for the first time.
Function: Helps issuers raise fresh capital, which can be used for expansion, paying off debt, or other purposes.
Secondary Market
Description: The secondary market is where previously issued securities are bought and sold among investors. It provides liquidity and the opportunity to trade securities after their initial issuance.
Example: Stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ, where investors trade existing shares.
Function: Provides liquidity to investors, allowing them to buy and sell securities quickly and easily.
Equity Market
Description: The equity market, also known as the stock market, is where shares of companies are issued and traded. It includes both primary and secondary markets.
Example: Trading of shares of companies like Apple, Microsoft, and Amazon.
Function: Enables companies to raise capital by issuing shares and provides investors with ownership stakes in companies.
Debt Market
Description: The debt market, or bond market, is where debt securities such as bonds are issued and traded. These securities represent a loan made by an investor to a borrower (typically corporate or governmental).
Example: Government bonds, corporate bonds, and municipal bonds.
Function: Allows entities to borrow money at a fixed interest rate, providing a stable income stream for investors.
Derivatives Market
Description: The derivatives market is where financial instruments such as futures, options, and swaps, which derive their value from underlying assets, are traded.
Example: Futures contracts on commodities like oil or agricultural products, options on stocks.
Function: Provides instruments for hedging risk, speculating on price movements, and arbitrage opportunities.
Foreign Exchange Market (Forex)
Description: The foreign exchange market is where currencies are traded. It is the largest financial market in the world by trading volume.
Example: Trading pairs like EUR/USD or GBP/JPY.
Function: Facilitates international trade and investment by allowing currency conversion, and provides opportunities for speculation on currency price movements.