Capital Market

The term capital market denotes the financial market which links investors looking to invest their wealth and enterprises looking for access to capital. The term is most commonly used to refer to the market for long-term financing and investment (investment terms of more than one year), and the issuing, buying, selling and trading of long-term, non-negotiable securities. The stock market and the long-term bond market are the key components of the capital market. The long-term business loan, mortgage, microfinance and venture capital markets are sometime included in the broader definition of the capital market.

The capital market can be divided into two main categories. The primary market and the secondary market. The primary market is the market for newly issued securities. Securities such as stocks, bonds, notes, certificates and their derivatives are issued by enterprises or government agencies looking for capital in the form of investment or loans. These are then purchased by investors seeking a return on their investment in the form of interest, dividends or capital gains. The secondary market is the market on which securities and their derivatives are resold by investors to other investors or traded between investors. Because capital market investments are long-term, a secondary market is necessary in order for investors to opt out of investment before the end of the investment term (in the case of bonds, for example) or when the investment term is open-ended (as is the case with stocks, for example).

The secondary market is the most important market for many capital market securities, and particularly for the stock market, with transactions between investors typically far outnumbering transaction between issuers and investors. Investors who buy, sell or trade long-term investment products are participating in the capital market, even if they only hold capital market investments for a short amount of time.

While many different stakeholders – including stock exchanges, investment banks, investment funds, securities brokers and over-the-counter exchanges – all play a role in the capital market, the capital market itself is independent and has developed organically over thousands of years because of the need to grow, sustain and transfer wealth and to fund enterprises.

Today many sectors of the capital market are regulated by exchanges, supervisory authorities and financial intermediaries. However, developments such as the adoption of the blockchain as a means of issuing securities in the form of tokens or cryptocurrencies via initial coin offerings (ICOs) continue to pose a challenge for regulators, much like the development of black markets has traditionally posed challenges to regulators seeking to control the flow of capital and the exchange of goods and services.

See also: Money market

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Editor Daniel Dreier
Daniel Dreier is editor and personal finance expert at moneyland.ch.