Capital market: what is it and how does it work?

Capital market: what is it and how does it work?

Finance is a complex field that involves many different instruments and markets. One of the most important areas of finance is the capital market. In this article, we will look at the capital market in detail, its definition, functioning and the various aspects that are important in the analysis.

What is the capital market?

The capital market is a part of the financial system that allows companies and governments to raise capital through the issuance of securities. These are long-term financial instruments that enable investors to acquire shares in the company or in government projects. The capital market can be divided into two main segments: the primary market and the secondary market.

Primary market

In the primary market, newly issued securities are sold to investors for the first time. This typically occurs through a company's initial public offering, where shares are sold to the public. The proceeds from the sale of the shares go directly to the company, which can use it to invest in its business.

Secondary market

The secondary market is the market on which existing securities are traded. Here investors can sell their stocks or bonds to other investors. This market provides liquidity and allows investors to sell their investments if they wish.

How does the capital market work?

The capital market functions through the interaction of issuers, investors and financial intermediaries. Issuers are those who issue new securities, be it a company issuing stocks or a government issuing bonds. Investors are those who buy these securities, be they institutional investors such as mutual funds and pension funds or individual investors.

Financial intermediaries such as investment banks and brokers play an important role in connecting issuers and investors. They support companies in issuing securities and help investors in selecting and purchasing securities.

Types of securities

There are different types of securities traded on the capital market. The best known are stocks and bonds.

Shares

Stocks represent ownership shares in a company. When an investor buys shares, he or she becomes a co-owner of the company and has a say in important decisions. In addition, the shareholder is entitled to a portion of the company's profits in the form of dividends.

Bonds

Bonds are debt instruments issued by companies or governments to raise capital. When an investor buys a bond, he or she is lending money to the issuer and receives regular interest payments in return. At the end of the term, the borrowed capital is repaid.

Capital market and the economy

The capital market plays an important role in the economy as it allows companies and governments to raise capital for investments. Through investments in production facilities, research and development and infrastructure projects, the capital market contributes to economic development and creates jobs.

The capital market also influences household consumption and savings rates. High returns on the capital market can create incentives for households to invest their savings, which in turn stimulates the economy.

Frequently asked questions

What is the difference between the capital market and the money market?

The money market is a part of the financial system that focuses on short-term financial instruments that have a maturity of less than one year. The capital market, on the other hand, deals with long-term financial instruments that have a term of one year or longer.

Why is the capital market important?

The capital market is important because it helps companies and governments raise long-term capital for investments. This contributes to economic development and growth and allows investors to diversify their assets and generate returns.

What risks are associated with the capital market?

The capital market involves various risks, including market risk, liquidity risk and political risk. Investors should be aware that they may lose their invested capital and be aware of the risks before investing in the capital market.

Conclusion

The capital market is an important part of the financial system that allows companies and governments to raise capital for long-term investments. By issuing stocks and bonds, they can obtain capital for growth and development. The capital market also offers investors the opportunity to diversify their assets and generate returns. It is important to be aware of the risks and develop a sound investment strategy before investing in the capital market.