The capital market is where governments and businesses generate a long term financial income of the economy. The generation of money in this market has a payout time of more than a year. In capital markets, there are bonds and stocks market and each of them can further be subdivided into primary and secondary markets. The primary and secondary stock markets deal with the trading of the equity of the business and the primary and secondary bond markets are dealing with trading debt. Transactions other than primary and secondary usually occur in the money market.
The stock segment of the capital market trades in equity. A segment of the company is bought by the purchaser in this case. The stock certificate owners have possession of a portion of business which is the same amount to the percentage of the stocks they own against the total stock issued. For example, if a holder of stock had 100 shares of a company which issued total 2,000 stock shares, then that stockholder would possess 5% of the business. Debt is dealt under the bond segment of the capital markets and a bond basically is a loan. The issuer asks for the money and the purchaser gives it to them. The issuer need to pay back the loan, within a certain time frame, often with interest by the term of bond markets. Not like a stock, the holder of bond has no ownership in the company.
The primary market has the role of selling the securities for the first time and the company issue the securities directly to the investors. It is also the market to attract the financial capitals available on medium and long terms, both on the internal capital markets, and on the international one appealing to the public economies.
Through the primary issuances, once the financial instruments or the securities are set into the markets they are the object of transactions on the secondary market. Existing the secondary markets not only propose bonds' or shares' owners the possibility to capitalise them before they bring a profit but also increases investors' willingness in primary markets, as the investors know that if the need comes up, they can be able to cash out their investments quickly. At the same time, the secondary market gives the way to focus in the same place institutional or private investors who can purchase or sell the securities, guarantee that they are valuable and can be put into the circuit at any time.
The secondary market can almost be expressed as the free adjustment between the demand of securities and the offer of the securities in the first place for the capital needed and also for the political, social and economic state of a country. Therefore, the secondary capital market can be regarded as an ideal market in which the perfect environment for its unenclosed action is found the law of demand and offer. Making sure the mobility of liquidities on medium and long terms, of capitals, of any negotiable security which passes the primary market and at the same time the secondary market attracts amateur investors as well as professional investors hoping to maximise the profit in record time.
Losing or gaining a huge amount of money is easy in the capital market. Most countries with structured exchanges have some form of supervision department because a lot of money is transferring hands. It is the responsibility of the overseers to create and maintain a fair platform so that every seller and purchaser can access the same information. Everyone caught violating the rules is charged normally with securities fraud and labelled as inside traders.
In capital markets everyone who has interest can participate as it is transparent, open and public markets and one of the best structures of capital markets in the modern economy is that the disseminate information on capital markets, through its immediacy or volume of information and with the equal possible reception by all participants. The capital market circulation is characterised through the negotiable price and represented by securities and the instant transferability with reasonable transaction costs. Intermediaries, who have a vital part in connecting the issuers or owners of securities with the capital owners, make those transactions. It entails risks for both the investor and the issuer, nevertheless at the same time, it minimise and disperse the complex solutions, both the operational and financial one. The market is well organised, in the way that transactions are carried out as stated by certain norms, rules and principles accepted and known by participants. This does not imply the market administration, but the regulation with the aim of creating the circumstances for the disclosing of open competition, thus having a guarantee system which is open and free characteristic of all transactions.
The capital market gives a place for individuals and entities to ask for financial aids from investors and lenders. The importance of capital markets becomes more obvious when there was a time of recession because financing companies and banks normally restrict in lending and therefore, those who asking for finance become more dependent on capital markets. Capital markets have a lot of varieties containing stock exchange as well as other similar kinds of venues in which stockbrokers try to help to meet up investors or lenders with those who are in need of finance.
Government entities provide funds to public schools, national defence, healthcare programs and other different projects and operations in many nations. These services and programs are paid by the governments with tax revenues and usually governments borrow funds from the capital markets rather than increasing tax rates to cover the cost of such services and projects, and then pay back those debt through the tax revenues that have been saved up for many years . This shows that the levels of tax remain comparatively low, but still the governments keep hold of funding. The importance of capital markets becomes apparent when the credit rating of a government drops and also investors are unwilling to purchase the government bonds. Lack of funds from the markets can have a severe impact on the region or nation’s economy as the governments must increase the tax rates.
Normally, when entrepreneurs want to start new business ventures, they either have to use their own money or have to gain finance loans from banks to cover the costs of business ventures. Those who are with poor credit rating and who lacked the cash assets were not able to set off their own business because of not having funds. As a result, the importance and usefulness of capital markets become crystal clear for business owners who want to raise fund for company expansions from the sale of company stocks and bonds on the market where they can offer their shares to mass number of potential investors without advertising or any effort. Investors get benefit from the capital markets as the investments on stock markets are growing and are better than the traditional bank products, for example, deposit certificates.
The regulation of the capital market is a collective term for a number of different tactics which are planned to maintain a capital market’s integrity; even significant swings are occurred in the economy. Several systems are practised as part of the regulatory process, along with some related laws of the government which are applied by regulatory organisations. Furthermore, to help keeping the market place constant and look after the interests in the capital market, participants inside the capital market can use their own strategies and methods whilst still remaining in compliance with any rules and regulations established by a government agency.
Standards and procedures of the capital market regulation are set up through the related agencies by government. Those standards and procedures are designed to guard participants from exploitation within capital markets. This contains giving detailed information in others, limiting some sort of transactions and complete announcement in some kinds of business dealings. The general reason for safeguarding the participants in the market place is that, so that those markets can be a support to the general economy and are perhaps remain unchanged, other than exerting an unfavourable effect on the economy.
Regulation of the capital market takes place because of the people who actively take part in those markets. Some business associations and co-operatives which are involved in specific industries are often self-regulated. This means that not only all associates of the business are following the standards of the government regulation, but also are in compliance with the industry standards which may perhaps go beyond those minimum standards. Members who decide not to engage in industry standards for general business practices, quality and pricing may find it difficult to compete and sooner or later they leave together from the market.
Together with the industry-driven and governmental capital market regulation, the objective of the market place is making sure that all the transactions happening are not only legal but also ethical. This is right whether the market contains exports and imports as part of various kind of ongoing business arrangement or the capital market involved has a domestic nature. Eventually, rules and regulations will be updated or adapted according to the changes inside the market place, as well as certified organisations will amend their standards to cope with the new standards. Processing the regulation of capital market may not always be easy. While the process of capital market regulation may not always be easy, the efforts made at every level make participating in the market safer for everyone involved.
Basically, the capital market is composed of two capital markets â€" equity capital markets and debt capital markets. Debt capital markets can be defined as the markets which are set up for selling and purchasing different kinds of debt securities. Governments and businesses are generating revenue by either investing in the securities which are offered for sale or selling the securities on a debt capital market. The securities traded in this market are generally for a long term which means more than one calendar year. Companies or government agencies issue the debt securities which are bonds, as well as they offer to sell those bonds in a controlled market place. Many nations operate different kinds of regulatory agencies to check and monitor the activities which occur inside the markets, ensuring all activities are carrying out within the scope of current rules and regulations. Financial services authority or FSA assigns to this task in the United Kingdom. In the United States, SEC or the Securities and Exchange Commission is in charge of overseeing debt capital markets functions in order to protect participants from unlawful actions or fraud.
Using debt capital markets for specific projects to make revenue is very common. For instance, a bond issue which is designed to pay interest to investors semi-annually or quarterly is created and sold by a company, with the total purchase price of the bond redeemed once the issue reaches maturity several years down the road. On the other hand, the issue is structured to trade the bond at less than face value, but after the bond matures, allow the bond owner to redeem it at face value. In any circumstances, the issuer has funds made by the bond issue for the whole life, a move which lets the government or company to finish projects that finally start to make revenue on their own prior to the bond matures. This in turn supplies the funds to manage the bond redemption and leaves the issuer with a new source of income that is likely to remain viable for many years to come.
Investors get benefits from debt capital markets. Investors are more likely to make returns seeing as the kinds of investments traded in these markets suppose to be relatively low in risks. Investments in debt capital markets and similar bond issues is a good way to anchor the company’s financial portfolio while that return may be somewhat modest compared to high risk business ventures. This is because the debt capital instruments provide some stability that serves as the platform for taking on a few investments that are more volatile in nature. In addition, the rate of return on debt instruments traded in debt capital markets is higher than the interest earned on savings accounts and similar plans, making them more attractive in terms of a money-making investment
