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What is a Capital Market?
A Capital Market is a financial marketplace where long-term debt and equity securities are bought and sold. It connects investors seeking returns with businesses and governments that need capital for growth, operations, or infrastructure.
Definition
A Capital Market is a market for trading long-term financial instruments such as stocks, bonds, and other investment securities.
Key Takeaways
- Facilitates long-term financing for companies and governments.
- Includes primary markets (new issues) and secondary markets (trading existing securities).
- Supports economic growth by allocating capital efficiently.
Understanding Capital Markets
Capital markets play a vital role in the global economy by enabling capital formation and investment. They allow:
- Companies to raise funds by issuing shares or bonds.
- Governments to finance public projects.
- Investors to earn returns through long-term investments.
Capital markets consist of two main segments:
- Primary Market: Where new securities are issued (e.g., IPOs, bond issuances).
- Secondary Market: Where existing securities are traded (e.g., stock exchanges).
These markets function through brokers, investment banks, exchanges, regulators, and institutional investors.
Formula (If Applicable)
No single formula defines capital markets, but common valuation tools include:
- Bond Yield Formulas
- Dividend Discount Model (DDM)
- Price-to-Earnings Ratio (P/E)
Real-World Example
When Apple issues corporate bonds to finance new technology development, it uses the primary capital market. Later, investors trade these bonds in the secondary market.
When a startup lists its shares through an IPO on NASDAQ, it accesses capital markets for the first time.
Importance in Business or Economics
Capital markets support:
- Economic development and job creation
- Efficient allocation of savings to productive investments
- Liquidity for financial assets
- Pricing transparency and market stability
Healthy capital markets promote innovation and long-term investment, benefiting both businesses and society.
Types or Variations
- Equity Markets: Stocks, ETFs
- Debt Markets: Corporate bonds, government bonds
- Derivatives Markets: Futures, options, swaps
- Foreign Exchange Markets: Currency trading
Related Terms
- Primary Market
- Secondary Market
- Securities Exchange
Sources and Further Reading
- World Bank – Capital Market Development: https://worldbank.org
- OECD Financial Markets: https://oecd.org
- Investopedia: https://investopedia.com
Quick Reference
- Long-term securities marketplace.
- Includes stock and bond markets.
- Supports investment, liquidity, and economic growth.
Frequently Asked Questions (FAQs)
How do capital markets differ from money markets?
Money markets handle short-term debt (less than one year), while capital markets deal with long-term financial instruments.
Who participates in capital markets?
Institutional investors, retail investors, governments, corporations, and financial intermediaries.
Are capital markets regulated?
Yes. Regulators enforce transparency, prevent fraud, and protect investors.
