The capital market is a set of institutions through which the supply and demand of long and mid term means of financing, like stocks and mid- and long-term debt, meet.
Through the monetary market, unlike the capital market, short term assets are bought and sold. Together, the capital markets and the monetary market form the financial market.
Examples of assets traded in the capital market:
- Long term government bonds.
- Long term corporate bonds.
Function of the capital market in the economy
Through the capital market, a big portion of the savings of the economy is channeled into investment. Capital market efficiency has an influence in economy growth. Capital market efficiency depends on transaction costs, information availability and legal stability.
Most of the transactions of the capital market are made electronically. The capital market is not a central institution where every transaction is made, but it consists of multiple interrelated systems.
The biggest financial centers are
- New York
- Hong Kong
Primary and Secondary Markets
Primary Market: It’s the part of the market where new financial instruments are sold. Funds raised in primary markets go directly to the issuers (corporations or governments). The asset’s are sold only once in the primary markets.
Secondary Market: It’s the part of the market where instruments issued in the primary market are bought and sold. Investors who bought instruments in the primary market can offer them in the secondary market. In the secondary market, every asset can be bought and sold several times.
Almost every transaction in primary markets are done between institutions like governments, investment and pension funds, central banks, treasury departments and corporations.
In secondary markets, the participation of individuals is rising, thanks to the recent reduction in transaction cost caused by the computerization of the markets.
Primary market is a key piece to join savings with investments. Secondary market has an influence in primary market, because investors of the primary market can resell the asset’s bought in the primary market and they do not need to keep their investments on their portfolio until its cancellation.