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The Virtuous Cycle: The Global Potential of Capital Markets

• It consists of stock exchanges, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), where equity shares, bonds, and other securities are traded.
• Overall, the functions of capital markets are essential in mobilizing savings, facilitating investment, managing risks, allocating capital efficiently, and supporting economic growth and development.
• Capital market theory makes reference to multiple forms of analysis that aim to predict the value of securities and the flow of supply and demand in the market.
• The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

They are backed by the tax base of local cities, counties, or states. Like treasuries, many munis pay tax-free interest. While not considered risk-free, munis are generally thought of as one of the least risky asset classes. Businesses then trade on an exchange, like the New York Stock Exchange (NYSE) or the NASDAQ. Each exchange has its own listing requirements that companies must follow to stay on the exchange.

Debt instruments

Once the shares are issued through IPO they get listed on the stock exchanges and are eligible to trade in stock exchanges. Once the securities are issued in the primary market, they are traded in the secondary market. This is where investors buy and sell securities among themselves. The company does not receive any money from these transactions.

This makes the capital market attractive because it offers easy access to cash when needed. The key distinction to keep in mind is that capital markets are places where capital can be raised, not just where assets can be traded among investors. Here, companies raise funds with the help of preferential allotment, rights issue, electronic IPOs, or the pre-selected issue of securities or private placement.

• Those who seek capital in this market are businesses, governments, and individuals.
• This is where existing securities are traded among investors.
• I think the growth- and prosperity-generating power of the capital markets will remain a dominant economic trend through the rest of the 21st Century.

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They serve as a crucial mechanism for companies and governments to raise long-term funds for various projects and investments. Let’s delve deeper into what capital markets entail and how they function. Once these financial instruments are issued, they enter the secondary market. Here, investors trade them among themselves without involvement from the issuing entity. The secondary market is where the familiar image of stock exchanges comes into play, as investors buy and sell securities on platforms like the National Stock Exchange or the Bombay Stock Exchange. Not to add confusion, but the exact definition of some of these terms can depend on the source.

Key Highlights

There are many thousands of such systems, most serving only small parts of the overall capital markets. what is meant by capital market Entities hosting the systems include investment banks, stock exchanges and government departments. Physically, the systems are hosted all over the world, though they tend to be concentrated in financial centres like London, New York, and Hong Kong. The capital market is a place where long-term financial instruments such as stocks and bonds are traded between buyers and sellers. It provides the ability for businesses, governments, and organizations to raise funds for expansion or other activities, including developing new products or paying off debts.

Usually, like an investment bank, the intermediary attaches an initial price to the shares. Once the sale materializes, firms take their shares to the stock exchange to facilitate trading between different investors. Capital markets structure is made of primary and secondary markets. Secondary markets are places where the trade of already issued certificates between investors are overseen by regulatory bodies. Issuing companies play no part in the secondary market.

How Capital Markets Work

They are of two types –• Primary market – deals with fresh stocks.• Secondary market – trading with old securities. Capital markets are a crucial part of a functioning modern economy because they move money from the people who have it to those who need it for productive use. Owned by 186 member countries and consistently rated AAA/Aaa.

Wealth from investments and savings is channeled in the capital market, which is used to increase production and boost the economy, in return for profit for lending or investing their money. Capital markets play a significant part in economics as they supply funding for long-term investment and improvement, which contributes to economic growth. A capital market assists an economy by providing a platform to gain funds for business operations, development activities, or wealth enhancement. The functioning of a capital market follows the theory of the circular flow of money. All issues on the primary market are subject to strict regulation.

The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. The capital market is no exception, but to some extent, the prices of securities reflect that they have incorporated the current information in the market. Examples of secondary markets are the London Stock Exchange, the New York Stock Exchange, NASDAQ, etc. We’re talking about thecapital structure of very real concern. No information on this Website constitutes business, financial, investment, trading, tax, legal, regulatory, accounting or any other advice. If you are unsure about the meaning of any information provided, please consult your financial or other professional adviser.

Every corporate finance professional needs to understand capital structure—the mix of debt and equity that funds a company’s growth, operations, and strategic moves. In this episode of Corporate Finance Explained, we break down the key concepts, trade-offs, and real-world examples of how companies optimize their capital structure. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two major stock exchanges in India.

In a capital market, the primary mechanism through which funds are raised is the issuance of financial instruments by the entities seeking capital. This issuance typically occurs in the primary market, where securities like stocks and bonds are introduced to the public for the first time. An Initial Public Offering (IPO) is a common method, allowing companies to go public and raise capital by selling shares to investors.

Regulatory bodies like the Securities and Exchange Board of India (SEBI) oversee and enforce rules to maintain fair, transparent, and orderly markets. Apart from bonds and stocks, capital markets may involve trading of other financial securities, including derivative contracts, such as options, various loans and other debt instruments, and commodity futures. When a company wants to raise money for long-term investment, one of its first decisions is whether to do so by issuing bonds or shares.

If it chooses shares, it avoids increasing its debt, and in some cases the new shareholders may also provide non-monetary help, such as expertise or useful contacts. On the other hand, a new issue of shares will dilute the ownership rights of the existing shareholders, and if they gain a controlling interest, the new shareholders may even replace senior managers. From an investor’s point of view, shares offer the potential for higher returns and capital gains if the company does well.

Following that issuance, the security trades on a secondary market (this is likely what you typically think of as the stock market). On the other hand, the secondary market refers to stocks, bonds, or other securities being traded between investors. When you buy stock through your broker, it’s an example of secondary market trading since your shares come from other investors, not the company itself. Capital markets refer broadly to the parts of a financial system that deal with raising capital through investments or trading investments with other investors.