In this post, we’ll unpack all you need to know about capital markets, defining exactly what they are, their purpose, the key participants involved, the different types, the main instruments traded and more.
What Are Capital Markets?
Capital markets (CM) are financial markets where people trade long-term financial instruments such as stocks, bonds and other debt instruments.
Capital Markets Versus Money Markets
Money markets provide short-term, lower risk, lower return funding focused on liquidity mainly through debt instruments.
Capital markets provide long-term, higher risk, higher return funding focused on growth through both debt and equity.
Purpose
There are 5 main roles of capital markets.
Firstly, to enable efficient resource allocation. Secondly, to facilitate capital raising by connecting those who need capital with those who have it. Thirdly, to provide a mechanism for trading securities. Fourthly, to enable price discovery. Fifthly, to create opportunities for wealth creation.
Participants
Participants include issuers who seek to raise funds, investors who provide capital, and intermediaries such as banks, brokers and regulators who ensure the system operates smoothly.
Types
There are two types of capital markets. The primary market is where new securities are issued for the first time. The secondary market is where existing securities are traded among investors.
Instruments
There are two main types of instruments in CM; equity and debt.
Equity refers to ownership in a company, typically through shares. Debt refers to borrowing, typically through bonds.
Summary (TL;DR)
Capital markets are financial markets where people trade long-term financial instruments.
CM serve to enable efficient resource allocation, facilitate capital raising, enable trading of securities, enable price discovery and create opportunities for wealth creation.
Participants include issuers, investors and intermediaries. Instruments include equity and debt.
