Capital market is a part of the financial market, where money with a circulation period of more than one year circulates. Money with a shorter term of circulation (up to one year) is placed on the money market. Free capital is redistributed on the capital market and invested in various profitable financial assets.
Capital Markets explained
A capital market is a market where buyers and sellers participate in the trading of financial securities. Financial securities are usually classified as long-term investments. They may be company stock or bonds, etc. In addition to trading, corporations issue bonds and stocks in the capital market in order to raise funds for their needs. All trading takes place electronically. The stock market facilitates such trading with various intermediaries, including brokers.
In the capital market, buyers and sellers interact with each other by buying and selling financial securities. In fact, the capital market is part of the financial system. Another part of the financial system is the money market. The structure of the capital market provides the basis for the long-term movement of capital. It is known that the money market deals mostly with short-term financing, while the capital market deals with long-term financing. The main purpose of the capital market is to direct those who have savings to those who need such savings.
Based on the lifetime of the financial instruments and the durability of its trading, the capital market can be divided into two types:
The primary market is the initial offering of recently issued stock and bond issues and their sale to investors. Usually governments of all levels and rarer companies are those trying to attract the attention of the investors in raising long-term funds. It is commonly known that governments are confined to issue only bonds, while companies are able to issue both stocks and bonds. Pension, hedge, sovereign wealth funds, investment banks and private investors purchase most of the stocks and bonds.
The secondary market serves for trading of securities that were issued earlier than a year ago. The best-known venue for the secondary market is securities exchanges.
Capital Market Models
Both economics and business management have attempted to model the basic attributes of capital markets. In particular, the theoretical constructs of perfect and imperfect capital markets are used.
Perfect capital market. A characteristic feature of this simplified theoretical model of a perfect capital market is that the trading objects in the market are homogeneous and there is complete transparency of the market. The possibilities for raising and investing capital are limitless. Market participants can react quickly to changes in quantity and price because there are no time delays. In a perfect capital market there is no distinction between equity and debt, which means that there is only a single and unchanging market interest rate.
Imperfect capital market. A capital market can be called so in case of at least one of the previous assumptions being not met.