What are Capital Markets?

M. McGee

The capital market is the economic term for long-term income generation by businesses and governments. This market assumes that the money generated has a payout period of greater than one year. Capital markets include both the stocks and bonds market and the primary and secondary version of each. There is a great deal of oversight in capital markets, as a huge amount of money changes hands. Most participating governments have regulatory bodies that watch over the system.

Stock certificates.
Stock certificates.

In order to be part of the capital markets, the expected payout for the money is supposed to be greater than one year. If the expected payout is less than one year, then that transaction takes place in the money market instead. For instance, a seven-year treasury bond is part of the capital markets, but a treasury bill is in the money market.

A capital market is a place where publicly traded companies can sell debt and equity securities as a way to raise funds.
A capital market is a place where publicly traded companies can sell debt and equity securities as a way to raise funds.

Capital markets are primarily made up of four different areas. The primary stock and secondary stock market deal with the selling of business equity, and the primary and secondary bond market deals with selling debt. Other transactions typically take place in the money market.

The stock portion of the market deals in equity. In this case, the buyer is purchasing a portion of the company. The holder of a stock certificate owns a portion of business that is equal to the percentage of the stocks they own against the total stock issued. For instance, if a stockholder owned 10 shares of a company that issued 1,000 stock notes, then that person would own 1% of the business.

The bond part of capital markets deals in debt. A bond is essentially a loan; the issuer asks for money, and the purchaser gives it to them. The term of the bond states that the issuer needs to repay the loan, often with interest, within a certain time frame. Unlike a stock, the bond holder has no ownership in the company.

The primary and secondary areas of the market involve the methods and parties involved in the sales. In the primary market, the companies that issued the stock or bond are dealing directly with the buyer. In the secondary market, two parties unrelated to the issuer are trading the stock or bond.

It is easy to gain or lose a huge amount of money in capital markets. Since so much money is changing hands, most countries with organized exchanges have some form of oversight department. It is the job of the overseers to maintain a fair platform so everyone that is buying and selling has access to the same information. People caught breaking the rules are typically charged with securities fraud and labeled as inside traders.

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