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Capital market
Quick definition
Copy link to sectionA capital market is a financial system consisting of stocks, bonds, and other investment vehicles that people trade all over the world.
Key details
Copy link to section- Capital markets are a means for companies to raise the money they need to fund their operations
- A capital market consists of a primary and secondary market, and most people interact with the latter
- The London Stock Exchange and New York Stock Exchange are two examples of capital markets
What is a capital market?
Copy link to sectionA place where companies raise money through the issuing of investment products, such as stocks and bonds. A capital market is a financial system made up of primary and secondary markets, where these products are first issued and then bought and sold.
What is a primary market?
Copy link to sectionA 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.
What is a secondary market?
Copy link to sectionA 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.