Capital market

Transactions on capital markets are generally managed by entities within the financial sector or the treasury departments of governments and corporations, but some can be accessed directly by the public. As an example, in the United States, any American citizen with an internet connection can create an account with TreasuryDirect and use it to buy bonds in the primary market. However, sales to individuals form only a small fraction of the total volume of bonds sold. Various private companies provide browser-based platforms that allow individuals to buy shares and sometimes even bonds in the secondary markets. There are many thousands of such systems, most serving only small parts of the overall capital markets. Entities hosting the systems include investment banks, stock exchanges and government departments. Physically, the systems are hosted all over the world, though they tend to be concentrated in financial centres like London, New York, and Hong Kong.

A capital market can be either a primary market or a secondary market. In a primary market, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments issue only bonds, whereas companies often issue both equity and bonds. The main entities purchasing the bonds or stock on primary markets include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf. In the secondary market, existing securities are sold and bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises.^[2]

A second important division falls between the stock markets (for equity securities, also known as shares, where investors acquire ownership of companies) and the bond markets (where investors become creditors).^[2]

Part of a series on
Finance
Markets Assets Asset (economics) Bond Asset growth Capital asset Commodity Derivatives Domains Equity Foreign exchange Money Over-the-counter Private equity Real estate Spot Stock Participants Angel investor Bull (stock market speculator) Financial planner Investor institutional Retail Speculator Locations Financial centres Offshore financial centres Conduit and sink OFCs
Instruments Bond Cash Collateralised debt obligation Credit default swap Time deposit (certificate of deposit) Credit line Deposit Derivative Futures contract Indemnity Insurance Letter of credit Loan Mortgage Option (call exotic put) Performance bonds Repurchase agreement Stock Security Syndicated loan Synthetic CDO
Corporate General Accounting Audit Capital budgeting Capital structure Corporate finance Credit rating agency Enterprise risk management Enterprise value Risk management Financial statements Transactions Leveraged buyout Mergers and acquisitions Structured finance Venture capital Taxation Base erosion and profit shifting (BEPS) Corporate tax haven Tax inversion Tax haven Transfer pricing
Personal Credit / Debt Employment contract Financial planning Retirement Student loan
Public Government spending Final consumption expenditure Operations Redistribution Transfer payment Government revenue Taxation Deficit spending Budget (balance) Debt Non-tax revenue Warrant of payment
Banking Central bank Deposit account Fractional-reserve Full-reserve Investment banking Loan Money supply Lists of banks Bank regulation Banking license Basel Accords Bank for International Settlements Financial Stability Board Deposit insurance Separation of investment and retail banking
Regulation · Financial law International Financial Reporting Standards ISO 31000 Professional certification Fund governance
Economic history Private equity and venture capital Recession Stock market bubble Stock market crash Accounting scandals
Outline Business and Economics portal Money portal
v t e

The money markets are used to raise short-term finance; including loans that are expected to be paid back as early as overnight. In contrast, the "capital markets" are used to raise long-term finance, in the form of shares/equities, and loans that are not expected to be fully paid back for at least a year.^[1]

Funds borrowed from money markets are typically used for general operating expenses, to provide liquid assets for brief periods. For example, a company may have inbound payments from customers that have not yet cleared, but need immediate cash to pay its employees. But when a company borrows from the primary capital markets, often the purpose is to invest in additional physical

Together, money markets and capital markets form the financial markets, as the term is narrowly understood.^[b] The capital market is concerned with long-term finance. In the widest sense, it consists of a series of channels through which the savings of individuals and institutions are made available for industrial and commercial enterprises and public authorities. This process of channeling savings into productive investments is crucial for economic growth and development. Moreover, capital markets provide opportunities for both individuals and institutions to diversify their investments, thereby managing risk and potentially enhancing returns over the long term.^[3]

Normal

Compared to the United States, companies in the European Union have a greater reliance on bank lending for funding. Efforts to enable companies to raise more funding through capital markets are being coordinated through the EU's Capital Markets Union initiative.^[5][6][7][8]

When a government wants to raise long-term finance it will often sell bonds in the capital markets. In the 20th and early 21st centuries, many governments would use

Most capital market transactions take place on the secondary market. On the primary market, each security can be sold only once, and the process to create batches of new shares or bonds is often lengthy due to regulatory requirements. On the secondary markets, there is no limit to the number of times a security can be traded, and the process is usually very quick.^[e] Transactions on the secondary market do not directly raise finance, but they do make it easier for companies and governments to raise finance on the primary market, as investors know that if they want to get their money back quickly, they will usually be easily able to re-sell their securities. Sometimes, however, secondary capital market transactions can have a negative effect on the primary borrowers: for example, if a large proportion of investors try to sell their bonds, this can push up the yields for future issues from the same entity. An extreme example occurred shortly after Bill Clinton began his first term as President of the United States; Clinton was forced to abandon some of the spending increases he had promised in his election campaign due to pressure from the bond markets.^{[citation needed]} In the 21st century, several governments have tried to lock in as much as possible of their borrowing into long-dated bonds, so they are less vulnerable to pressure from the markets. Following the 2008 financial crisis, the introduction of quantitative easing further reduced the ability of private actors to push up the yields of government bonds, at least for countries with a central bank able to engage in substantial open market operations.^[9][11]

A variety of different players are active in the secondary markets. Individual investors account for a small proportion of trading, though their share has slightly increased; in the 20th century it was mostly only a few wealthy individuals who could afford an account with a broker, but accounts are now much cheaper and accessible over the internet. There are now numerous small traders who can buy and sell on the secondary markets using platforms provided by brokers which are accessible via web browsers. When such an individual trades on the capital markets, it will often involve a two-stage transaction. First they place an order with their broker, then the broker executes the trade. If the trade can be done on an exchange, the process will often be fully automated. If a dealer needs to manually intervene, this will often mean a larger fee. Traders in investment banks will often make deals on their bank's behalf, as well as executing trades for their clients. Investment banks will often have a division (or department) called "capital markets": staff in this division try to keep aware of the various opportunities in both the primary and secondary markets, and will advise major clients accordingly. Pension and sovereign wealth funds tend to have the largest holdings, though they tend to buy only the highest grade (safest) types of bonds and shares, and some of them do not trade all that frequently. According to a 2012 Financial Times article, hedge funds are increasingly making most of the short-term trades in large sections of the capital market (like the UK and US stock exchanges), which is making it harder for them to maintain their historically high returns, as they are increasingly finding themselves trading with each other rather than with less sophisticated investors.^[9][12]

There are several ways to invest in the secondary market without directly buying shares or bonds. A common method is to invest in mutual funds^[f] or exchange-traded funds. It is also possible to buy and sell derivatives that are based on the secondary market; one of the most common type of these is contracts for difference – these can provide rapid profits, but can also cause buyers to lose more money than they originally invested.^[9]

This article needs to be updated. Please help update this article to reflect recent events or newly available information. (November 2024)

All figures given are in billions of

A great deal of work goes into analysing capital markets and predicting their future movements. This includes academic study; work within the financial industry for the purposes of making money and reducing risk; and work by governments and multilateral institutions for the purposes of regulation and understanding the impact of capital markets on the wider economy. Methods range from the gut instincts of experienced traders, to various forms of

Capital controls are measures imposed by a state's government aimed at managing

• Bank
• Center for Audit Quality (CAQ)
• Committee on Capital Markets Regulation (United States)
• Credit union
• Financial market
• Financial regulation
• Stock exchange
• Capital Markets Union