What Are Capital Markets

The capital market is a general term used to denote two main types of markets, featuring an array of products. A capital market is a financial system made up of primary and secondary markets, consisting of stocks, bonds, and other investment vehicles that people trade all over the world.

I. Primary Market

A primary market is a segment of the capital markets where securities are created for the first time. This is a marketplace where firms float stocks and bonds for investors to buy for the first time. Initial public offerings form the basis of a primary market, as they provide an opportunity for private entities to issue shares for the first time to the public.

A rights offering, like an IPO, provides listed companies an opportunity to raise additional equity in a primary market. Underlying investors are provided an opportunity to acquire rights based on the amount of shares of a company they own. Private placement and preferential allotment are other offerings that act as components of a primary market.

The primary market offering comes with lots of regulations that issuing companies must adhere to as a way of protecting investors. One of the biggest requirements is the filing of financial statements with regulators. Regulators must also approve the offerings before they go public.

Most primary market offerings, such as IPOs, are geared towards institutional investors as they come with caps on the amount of shares one can buy. Companies usually turn to investment bankers to target institutional investors who can buy offerings in large volumes and ensure that available securities are sold within a short period.

II. Secondary Market

A secondary market is a capital market segment where securities already issued in a primary market are traded. The stock market offered by exchanges such as the London Stock Exchange and the New York Stock Exchange are examples of secondary markets where securities are traded daily.

Secondary markets provide investors, regardless of capital, with a chance to trade securities of their choice without restrictions. You can buy and sell shares of a company at any given time, as long as you can pay the asking price.

In contrast to the primary market where prices of securities are set before an IPO, in secondary markets prices fluctuate every second depending on forces of supply and demand in the market. In addition to paying the underlying price of a security, traders must also pay a commission to the broker who purchases and sells the securities on their behalf in the secondary market.

Types of Secondary Markets

The auction market is a type of secondary market where buyers and sellers meet in one location, haggling over the buy and sell prices of securities.

The dealer market on the other hand is a type of secondary market where people trade through electronic networks. It is the bigger of the two markets in terms of participants, as it draws millions of people all over the world through trading platforms.

III. Primary Market vs. Secondary Market Table