Concept of Capital Market

Capital markets are markets where the channelling of savings and investments takes place between suppliers and needy parties. Suppliers include parties like individuals or financial institutions that have capital. This capital can be used for lending or investing. Financial institutions, in particular, involve banks and other investors. Needy parties are those who are in need of capital like individuals, entrepreneurs, business organizations, and governments. The concept of capital market in real life consists of bond and stock markets. These markets facilitate the improvement of transactional efficiencies. We will also take a look at the difference between the capital market and the money market.

Understanding the Concept of Capital Market

The concept of capital market is a broad term that helps in describing in-person and digital spaces. In such spaces, there is the trading of various types of financial instruments among different entities.

These spaces or venues are as follows:

• Stock market
• Bond market
• Currency exchange markets
• Foreign exchange markets

The concentration of most capital markets is in the world’s major financial centres. Such financial centres are as follows:

• Hong Kong
• Singapore
• London
• Paris
• Amsterdam
• New York

Capital markets involve the following two important parties:

• Suppliers of funds
• Users of funds

Suppliers are as follows:

• Households (via the savings accounts in banks)
• Financial institutions

Financial institutions are as follows:

• Banks
• Pension and retirement funds
• Life insurance companies
• Charitable foundations
• Non-financial companies that generate excessive amounts of cash

The users of funds in the capital markets are as follows:

• Home and motor vehicle purchasers
• Non-financial companies
• Entrepreneurs
• Governments
• Other needy parties

The primary function of capital markets is the selling of financial products. Such products can be like interest-bearing debt securities or bonds and equities. Equities involve stocks, which represent ownership shares of an organization.

The division of capital markets take place into the following two parts:

• Primary markets
• Secondary markets

Types of Capital Market

There are two types of capital market in existence which are as follows:

• Primary Market: Known as the new issue market, it mainly deals with new securities. New securities are those that are issued for the first time in the stock. Its main function is the facilitation of the transference of the newly issued shares from organizations to the people. The main investors here are banks, financial institutions, and individuals.
• Secondary Market: Known as the stock market, the trading of securities happens here. Here, different entities buy and sell securities.

Difference Between Capital Market and Money Market

In the financial markets, there are two different types of markets

• Money market
• Capital market

 Use of the money market takes place for short-term borrowing and lending. In contrast, the use of the capital market takes place for long-term assets. Long-term assets are those whose maturity exceeds the period of one year.

The concept of the capital market involves the trading of certain financial products for a long duration of time. Such financial products are:

• Stocks
• Bonds
• Debentures

Money markets are unorganised compared to capital markets. Here, trading in financial instruments takes place for a short period among brokers, money dealers, banks, and other financial institutions.   

Money markets involve various short-term debt instruments such as follows;

• Trade credit
• Commercial paper
• Certificate of deposit
• T bills

These short-term debt instruments of the money market are highly liquid. Moreover, their redeeming period is less than one year.

Trading in the money market usually takes place through an over-the-counter (OTC) procedure. This involves either no exchanges or a minute amount of exchanges. Business organisations and other parties can acquire short-term credit in the money market. This way, the money market plays a crucial role in ensuring liquidity in the economic system over a short time period.

Conclusion

Capital markets are markets that help in the channelling of savings and investments. This takes place between suppliers and needy parties. Suppliers include parties like individuals or financial institutions like banks. Those who need capital are individuals, entrepreneurs, business organizations, and governments. Capital markets are of two types- primary and secondary markets. The primary market deals with new securities that are issued in the stock market. Secondary markets involve the trading of securities. There is a difference between capital market and money market. The money market involves short term borrowing and lending. On the other hand, dealing with long-term assets takes place in the capital market.