What Are Capital Markets, and How Do They Work? (2024)

What Are Capital Markets?

Capital markets are where savings and investments are channeled between suppliers and those in need. Suppliers are people or institutions with capital to lend or invest and typically include banks and investors. Those who seek capital in this market are businesses, governments, and individuals. Capital markets are composed of primary and secondary markets. The most common capital markets are the stock market and the bond market. They seek to improve transactional efficiencies by bringing suppliers together with those seeking capital and providing a place where they can exchange securities.

Key Takeaways

  • Capital markets refer to the venues where funds are exchanged between suppliers and those who seek capital for their own use.
  • Suppliers in capital markets are typically banks and investors while those who seek capital are businesses, governments, and individuals.
  • Capital markets are used to sell different financial instruments, including equities and debt securities.
  • These markets are divided into two categories: primary and secondary markets.
  • The best-known capital markets include the stock market and the bond markets.

Understanding Capital Markets

The term capital market is a broad one that is used to describe the in-person and digital spaces in which various entities trade different types of financial instruments. These venues may include the stock market, the bond market, and the currency and foreign exchange (forex) markets. Most markets are concentrated in major financial centers such as New York, London, Singapore, and Hong Kong.

Capital markets are composed of the suppliers and users of funds. Suppliers include households (through the savings accounts they hold with banks) as well as institutions like pension and retirement funds, life insurance companies, charitable foundations, and non-financial companies that generate excess cash. The users of the funds distributed on capital markets include home and motor vehicle purchasers, non-financial companies, and governments financing infrastructure investment and operating expenses.

Capital markets are used primarily to sell financial products such as equities and debt securities. Equities are stocks, which are ownership shares in a company. Debt securities, such as bonds, are interest-bearing IOUs.

These markets are divided into two different categories:

  • Primary markets where new equity stock and bond issues are sold to investors
  • Secondary markets, which trade existing 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.

Primary vs. Secondary Markets

Primary Market

When a company publicly sells new stocks or bonds for the first time, such as in an initial public offering (IPO), it does so in the primary capital market. This market is sometimes called the new issues market. When investors purchase securities on the primary capital market, the company that offers the securities hires an underwriting firm to review it and create a prospectus outlining the price and other details of the securities to be issued.

All issues on the primary market are subject to strict regulation. Companies must file statements with the Securities and Exchange Commission (SEC) and other securities agencies and must wait until their filings are approved before they can go public.

Small investors are often unable to buy securities on the primary market because the company and its investment bankers want to sell all of the available securities in a short period of time to meet the required volume, and they must focus on marketing the sale to large investors who can buy more securities at once. Marketing the sale to investors can often include a roadshow ordog and pony show, in which investment bankers and the company's leadership travel to meet with potential investors and convince them of the value of the security being issued.

Secondary Market

The secondary market includes venues overseen by a regulatory body like the SEC where these previously issued securities are traded between investors. Issuing companies do not have a part in the secondary market. The New York Stock Exchange and Nasdaq are examples of secondary markets.

The secondary market has two different categories: the auction and the dealer markets. The auction market is home to the open outcry system where buyers and sellers congregate in one location and announce the prices at which they are willing to buy and sell their securities. The NYSE is one such example. In dealer markets, though, people trade through electronic networks. Most small investors trade through dealer markets.

Are Capital Markets the Same as Financial Markets?

While there is a great deal of overlap at times, there are some fundamental distinctions between these two terms. Financial markets encompass a broad range of venues where people and organizations exchange assets, securities, and contracts with one another, and are often secondary markets. Capital markets, on the other hand, are used primarily to raise funding, usually for a firm, to be used in operations, or for growth.

What Is a Primary vs. Secondary Market?

New capital is raised via stocks and bonds that are issued and sold to investors in theprimary capital market, while traders and investors subsequently buy and sell those securities among one another on thesecondary capital market but where no new capital is received by the firm.

Which Markets Do Firms Use to Raise Capital?

Companies that raise equity capital can seek private placements via angel or venture capital investors but are able to raise the largest amount through an initial public offering when shares list publicly on the stock market for the first time. Debt capital can be raised through bank loans or via securities issued in the bond market.

The Bottom Line

Capital markets are a very important part of the financial industry. They bring together suppliers of capital and those who seek it for their own purposes. This may include governments that want to fund infrastructure projects, businesses that want to expand, and even individuals who want to buy a home. They are divided into two different categories: the primary market where companies list new issues for the first time and the secondary market, which allows investors to purchase already-issued securities. The key benefit to these markets is that they allow money to move from those who have it to those who need it for their own purposes.

What Are Capital Markets, and How Do They Work? (2024)


What Are Capital Markets, and How Do They Work? ›

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.

What is capital market in simple words? ›

Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions.

How do capital markets make money? ›

The capital markets allow companies and governments to raise money by issuing securities for investors to buy in the form of stocks and bonds. The “capital” generated is then used to finance new research and development projects and build infrastructure and investments that can drive economic growth and productivity.

What is the best example of a capital market? ›

What are examples of capital markets? The New York State Exchange, NASDAQ, London Stock Exchange, and the American Stock Exchange are some highly organized capital markets. NASDAQ offers electronic trading as opposed to the other capital markets.

What is the difference between the stock market and the capital market? ›

What is the difference between capital markets and the stock market? The short answer is that the stock market is part of the capital market. While the stock market deals exclusively with stocks, the capital market includes stocks, bonds, and other forms of long-term capital.

Who needs funds from the capital market? ›

The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies).

What is the purpose of the capital markets? ›

Capital Markets allow businesses to raise long-term funds by providing a market for securities, both through debt and equity. Capital Markets offer a whole range of sometimes complicated products which allow businesses and banks not just to raise capital but also to hedge (or protect) against risks.

Who runs capital market? ›

In the primary market, there are four key players: corporations, institutions, investment banks, and public accounting firms. Institutions invest capital in corporations that seek to expand and grow their businesses, while corporations issue debt or equity to institutions in return for their capital investment.

Does capital markets pay well? ›

While ZipRecruiter is seeing hourly wages as high as $73.32 and as low as $20.91, the majority of Capital Market wages currently range between $32.45 (25th percentile) to $62.74 (75th percentile) across the United States.

Is real estate part of capital markets? ›

Real estate capital markets are essentially financial markets that deal with real estate assets. These markets play a critical role in the real estate industry as they provide developers and investors with access to capital.

What are the most popular capital markets? ›

Discover the range of markets and learn how they work - with IG Academy's online course.
  • New York Stock Exchange.
  • Tokyo Stock Exchange.
  • Shanghai Stock Exchange.
  • Hong Kong Stock Exchange.
  • London Stock Exchange.
  • Euronext.
  • Shenzhen Stock Exchange.

What companies are in capital markets? ›

Largest Companies In The Capital Markets Industry
SymbolNamePrice (Intraday)
GSThe Goldman Sachs Group, Inc.454.96
SCHWThe Charles Schwab Corporation74.80
IBKRInteractive Brokers Group, Inc.120.38
RJFRaymond James Financial, Inc.125.33
21 more rows

What are common stocks in capital market? ›

Common stock represents a residual ownership stake in a company, the right to claim any other corporate assets after all other financial obligations have been met. A company maintains a balance sheet composed of assets and liabilities.

Are Treasury bills traded in capital markets? ›

Assets Traded: The money market trades instruments such as Treasury bills, certificates of deposit, promissory notes, commercial papers and bonds redeemable in less than a year. The capital market trades in most bonds, stocks and other instruments either backed by equity or redeemable in more than one year.

Which is better money market or capital market? ›

Differences between money markets and capital markets

Money markets are typically shorter-term and carry less risk but offer less potential reward. Capital markets are typically longer-term and offer greater risk but potential for greater rewards,” Milan explains.

What is better a stock or bond? ›

As you can see, each type of investment has its own potential rewards and risks. Stocks offer an opportunity for higher long-term returns compared with bonds but come with greater risk. Bonds are generally more stable than stocks but have provided lower long-term returns.

What is capital market and its advantages? ›

There are two main types of such markets – primary market and secondary market. A capital market allows individuals and firms to raise funds for their needs and mobilizes savings from individuals, banks, and financial institutions.

What is the best definition of capital market quizlet? ›

Capital markets are where long term securities with maturities greater than 1 year are traded. Ex- common stock, preferred stock, bonds. Money Markets are where short term securities with maturities less than 1 year are traded.

Is the call money market a capital market? ›

Based on this definition, we can see that only two of the above markets are included in the capital market, that is Government Bond Market and the stock market. The other two, Call Money Market and Treasury Bill Market are part of the money market, as they deal with short-term financial instruments.


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