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What are capital markets? – Capital-owning entities or money-suppliers transfer savings and long-term investments to those in need of capital or fund users, such as businesses, governments, and individuals.These markets include the stock market, the bond market, the currency market, and the foreign exchange market, and they are mostly concentrated in the major financial centers, including New York, London, Singapore, and Hong Kong.
Suppliers include institutions that serve families and individuals, such as pension funds, life insurance companies, charities, and non-financial corporations that receive excess cash beyond their investment needs. The users of the funds are home and car buyers, non-financial businesses, and governments that finance investments in infrastructure and put them toward operating expenses.
Capital Market Benefits
This market is the main source of funds for an entity that is allowed to trade its securities by a regulatory body, where it can easily trade securities and sell debt obligations and equity to investors. Governments also use the capital markets to raise funds through the issuance of long-term bonds. But it cannot issue shares and therefore cannot issue securities.
Other advantages of capital markets are:
- Mobilizing savings to finance long-term investments.
- Reducing the cost of transactions and information and improving their quality.
- Rapid evaluation of financial instruments such as stocks and bonds.
- Facilitate settlement of transactions according to established timelines.
- Providing insurance against market or price risks through the trading of financial derivatives.
- Improving the effectiveness of capital allocation with the help of mechanisms that offer competitive pricing.
Types of capital markets
The majority of capital markets constitute computer-based electronic platforms, and they are of two types:
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The primary market is where new securities, such as shares and bonds, are issued and sold, and it is open to specific investors who purchase securities directly from the issuing company.These securities are considered initial public offerings. But when a public company goes public, it sells those shares and bonds to widely invested institutions, such as hedge funds and mutual funds.
The secondary market is where previously issued securities are traded, and it is regulated by regulatory bodies such as the Securities and Exchange Commission, as well as exchanges such as the New York Stock Exchange and Nasdaq. The secondary market in the capital markets also creates liquidity, which gives investors the confidence to buy securities.
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