Capital market explained with its functions

Capital Market:

Capital market is considered a part of the financial system that focuses on accepting the money of investors (institutions and individuals) through the issuing of debts and equities (in the form of bonds and shares), with the aim of judiciously utilizing their money into generating more profit which are shared accordingly among the investors involved. The investors in capital market are present in both the public and private sectors of the economy.

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The capital market has two main types of securities. These are equity and debt securities; and both are forms of investment. You can think of securities as fungible financial instruments or assets that are traded in capital market in order to raise capital. Therefore, investors are open to incur profits, or risks in losses when they invest in these securities.

Equity (securities) are the shares owned by a corporation, or company. The buying of equity share from a specific company automatically attribute the investors as shareholders of the company. In this regard, equities are traded on the stock market, and investors own a portion of the company. The profits made by the company are appropriately shared among the shareholders.

Equities are often termed as shares, and they are undated financial assets issued by a corporation, company, or firm in order to acquire funding.

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Unlike equities, debt are securities traded in the bond market. They involve the borrowing of money which is to be repaid with interest.

The bond market may also be termed as a debt or fixed-income market. Through this market, governments and corporations can raise sufficient capital to execute a project. For instance, the Nigerian government may issue treasury bonds which investors can buy in an attempt to fund a major infrastructural project. If this happens, then the government is obliged to pay the bondholders their principal plus interest at an appropriate time.

From the above introduction, capital markets are financial markets that unite buyers and sellers in order to trade various financial assets like currencies, bonds, stocks, commodities, and so on. In this regard, the biggest capital market in our world (as at the time of writing this article) include the New York State Exchange (NYSE), London Stock Exchange, American Stock Exchange, Frankfurt Stock Exchange, Shanghai Stock Exchange, Hong Kong Stock Exchange, and NASDAQ.

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The capital market is specifically a market for long-term investments. Meanwhile, recall that long-term debt securities and corporate equities are issued and traded in this market.

However, understand that the capital market is a crucial driver towards the development of any economy. Therefore, the market activities are properly regulated by one or more commissions. For example, the Nigerian capital market is regulated by the Securities and Exchange Commission (SEC). This is the apex regulatory body of the Nigerian capital market.

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Note: Capital market is quite different from the money market. An important point that distinguishes a capital market from money market is the fact that its debt securities are long-term, and are typically over a year, unlike the money market where short-term debts are bought and sold. Also, capital market is classified into the primary market and secondary market respectively.

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The capital market unite the corporations and investors through the issuance of debts and equities.

Any institution involved in the supply of (or demand for) long term debts and equities is considered a capital market.

Recall that the instruments through which the capital market achieve its goals are via the sale of securities such as bonds, stocks and mortgages.

Previously, when a government intend to raise a long-term financial structure, it will often sell bonds in the capital markets. In this regard, most governments utilize investment banks to oversee the process of sale of their bonds.

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In recent times, most governments will likely bypass investment banks and put up these securities (bonds) online for direct purchase. Typically, the volume of securities to be sold online are quite huge, with the government eventually holding only a small amount of auction yearly.

Stocks, shares, and bonds are securities purchased by individuals with the aim of making profit through it; and they can act as evidence with regards to a part contribution of the total capital used in running an existing corporation. Therefore, the shareholders are expected to receive an appropriate dividend, which is their reward for contributing money as investment into the corporation.

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Functions of Capital Market

In summary, the capital market can serve the following functions:

1. The capital market is utilized by corporations and governments to raise long-term capital through the issuing of stocks and bonds.

2. The funds realized from capital market can facilitate economic growth of a nation.

3. The capital market connect buyers and sellers to trade financial assets like stocks, equities and bonds.

4. Investments in the capital market can reduce (or even prevent) the unnecessary and lavish spending of individuals.

5. Individuals are presented with investment opportunities through the capital market.

6. Since the capital market has high liquidity, individuals can easily buy and sell securities. This can help them meet their impromptu financial needs.

7. Capital market may improve the risk management skills of individuals.