Capital markets are places where investors trade equity and debt securities such as stocks and bonds in a liquid and orderly manner. These markets are a vital part of a healthy national and global economy.
They channel the wealth of savers to those who can use it to make long-term investments. They also provide funding for businesses, governments and entrepreneurs.
Definition
Capital Markets and Securities Trading is a broad term used to describe the in-person and electronic spaces where different entities trade different types of financial instruments. These markets include the stock market and bond markets.
Capital markets are a key component of a functioning economy, as they allow companies to raise funds through the sale of stocks and bonds. These funds can then be used to grow the company or finance its operations.
Typically, these funds come from suppliers like banks, individual investors, insurance companies, business corporations, and retirement funds. These funds are used for a range of purposes, including investing in the company, buying new products and services, and making infrastructure improvements.
A capital market can be either primary or secondary, with the former being where securities are issued to raise capital, and the latter being where they trade among traders and investors. The primary market, sometimes called the “new issue” market, is where investors buy securities directly from a company that is offering them for sale.
Types
Capital markets are the channels where savings and investments are channeled from suppliers who have excess capital to those who need it for business expansion, wealth enhancement, or other uses. They provide essential funding for businesses, governments, and individuals.
In a capital market, securities can be traded and sold between investors in a liquid and orderly way. These include stocks and bonds, which are fungible financial instruments that hold value.
They are traded in centralized exchanges or over the counter, and are generally regulated by the Securities and Exchange Commission (SEC). Some securities and derivatives are also traded between market participants without an exchange or broker.
Stocks, bonds, and other securities are the main types of capital markets, but there are others, such as money markets. These are places that trade short-term debt instruments like treasury bills, certificates of deposit, and interbank loans.
Regulations
Capital markets provide a way for companies, governments, and others to raise funds. They involve selling shares of stock, bonds, treasury securities, or some other debt instrument.
The regulations and laws governing Capital Markets and Securities Trading are designed to protect investors from fraudulent activities. They also ensure that companies, brokers, and others involved in the trading of securities disclose all relevant facts to investors.
Effective market regulatory systems promote transparency, uniformity, and consistency of application while discouraging regulatory arbitrage. They must also have consequences that deter violations, which may include fines or other sanctions.
Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 to strengthen the regulation of the market. These acts established the SEC, which is charged with enforcing the law and protecting the public from fraud in the securities industry. The SEC also has the power to discipline regulated entities and persons associated with them.
Trading
Capital Markets and Securities Trading involve the trading of financial assets such as stocks, bonds, derivative contracts, and commodities. Traders place orders to buy or sell securities at specified prices, known as market and limit orders. Traders may also use advanced conditional orders, which execute when a stock meets certain conditions.
The capital market is a major part of the global economy. It allows companies to raise funds through the sale of shares and bonds.
This process helps a company grow and expand. The market is organized into primary and secondary markets.
A primary market is for trading freshly issued securities, known as initial public offerings (IPOs). The secondary market allows investors to purchase already-issued securities.
