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 essentially a financial system made up of primary and secondary markets, comprising of bonds, shares, among other investments that people trade all over the world.
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 invest in, 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, just like an IPO, provides listed companies an opportunity to raise additional equity in a primary market. In this case, 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. Some of the requirements include the filing of financial statements with regulators among other security agencies. Regulators must also approve the offerings before they go public.
Most primary market offerings, such as IPOs, are usually geared towards institutional investors as they come with caps on the amount of shares one can buy. Companies usually turn to investment bankers in a bid to target institutional investors who can buy offerings in large volumes and ensure available securities are sold within a short period.
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 perfect examples of secondary markets where securities are traded daily.
Secondary markets provide investors, regardless of capital, a chance to trade securities of their choice without restrictions. You can buy and sell shares of the company at any given time as long as they 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.
There are two types of secondary markets:
The auction market is a type of secondary market where buyers and sellers meet in one location, haggle over buy, and sell prices of securities.
The dealer market, on the other hand, is a type of secondary market whereby people trade through electronic networks. It is the bigger of the two, in terms of participants, as it draws millions of people all over the world through trading platforms.
Primary market Vs Secondary market table
|Comparison||Primary Market||Secondary Market|
|Meaning||Market for new securities||Market where issued securities are traded|
|Type of Purchasing||Direct purchasing||Secondary purchasing|
|Price||Fixed Price||Fluctuates depending on demand and supply|
|Financing||Companies raise capital through shares issuance for expansion||Does not provide financing to underlying companies|
|Number of times security can be sold||Only Once||Multiple times|
|Buying and selling||Between a company and investors||Between investors|