Capital Markets

Published Jan 25, 2023

Definition of Capital Markets

Capital markets are defined as financial markets where debt or equity-backed securities are bought and sold. That means they are used by sellers to raise capital for companies, governments, and other entities by issuing and trading a variety of different financial instruments. These instruments can be divided into two main categories: debt instruments (e.g., bonds) and equity instruments (e.g., stocks). Meanwhile, the buyers (i.e., capital suppliers) are usually banks and large-scale investors.

Example

To illustrate this, let’s look at the example of a company that wants to raise capital to finance its operations. To do so, it can issue bonds or stocks and sell them in the capital market. If it issues bonds, it promises to pay back the principal plus interest to the bondholders. On the other hand, if it issues stocks, it gives the stockholders a share of the company’s profits.

Now, once the company has issued its bonds or stocks (this happens in what is called the primary market), they can be traded on the capital markets. That means investors can buy and sell these instruments on the open market (this is called the secondary market). As a result, the company can raise the capital it needs to finance its operations.

Why Capital Markets Matters

Capital markets play an important role in the global economy. They provide companies with the capital they need to finance their operations and investments. In addition to that, they also provide investors with the opportunity to diversify their portfolios and earn a return on their investments.

Apart from that, capital markets are also important for governments, as they can use them to finance their budget deficits. And last but not least, they also help to allocate capital to its most productive uses, which can lead to economic growth.