Liquid assets are limited or scarce to a point. The overflow and underflow of capital are bad for the economy and financial balance in the trading industry. That is why the authority controls the liquidity of the currency. This is where the capital market comes in. Whenever there is a discussion of trade stock, currencies, bonds, and financial assets, the capital market is mandatory to include. But, do we know what is capital market?
The Capital market refers to the marketplace of financial trade between two or several parties in the mean of liquid assets like bonds, cash currency, trade stocks, and so on. It is the place where all the bond and stock trade-offs are conducted, monitored, and evaluated. The entire business industry relies on it.
In this article, we will be walking you through all the aspects of the capital market. And before getting into all those details, we will describe what the capital market represents in the business industry. But it is important to know that the capital market is responsible for holding the economy together and inducing growth.
What Is Capital Market? The Definition
The capital market is the other name of the exchange marketplace of financial documents like securities and liquid assets like shares, bonds, debentures, etc. To be precise, it is the place for businessmen, entrepreneurs, and investors when they need capital for their organizations. Firms or individuals approach this very marketplace when they run into the liquid asset shortage issue.
The capital market is the place to trade debts in reasonable conditions. The treasury unit of the national authority solely handles all the accesses and trade-offs of the marketplace here. The public relies on the capital market as the safe house for critical situations. The money market is different from the capital market. The capital market can influence inflation and deflation conditions.
Types of Capital Market
Economists have determined that there are two types of capital markets; primary capital market and secondary capital market. They are described below briefly.
Primary Capital Market
The primary capital market is the marketplace where the companies create and issue bonds, stocks, and other liquid assets to the public. One of the most important role of primary market is to issue publish share or conduct Initial Public Offering for companies. The fun collection here takes a united front. Everyone who purchases becomes an investor. So it can imply that the primary market is the market of common or public investors and businesses.
Now, let’s look at the characteristics of the primary market. It is the nature of the primary market that it is physically non-existent, yet it comes first when securities or financial documents are issued. Based on transactional policy, every issued security must float over the primary market first. Only then can it enter the secondary market. Sticks and bonds are the usual products of the market.
Secondary Capital Market
The market where previously issued/bought/sold liquid assets are traded among the investors is called the secondary market. The secondary consists of treasury bills, bonds, shares, debentures, preference shares, etc. these assets are products of the secondary market. It is also known as the stock market. So the basic concept of this market is that it is a marketplace for solving liquidity issues of the investors and firms. You can read our article to know about the features of stock market.
A secondary capital market is a place with physical existence and many outlets. The rates and prices in the secondary capital market are fairly controlled by the demand and supply of liquid assets in the business industry. There are in total 4 secondary markets. They are auctions and dealer markets, the other two are OTC (Over-the-Counter) and exchange markets. It allows the investors to raise a better portion of funds in the least period.
Importance of Capital Market – How is it Essential for an Economy?
The capital market plays the largest role in the global economy. Among the key economic growth factors, capital is the most contributing. The factors are labor, technology, and capital. The capital market makes the trade-offs possible. Its importance in the context of the economy is further below:
- It creates a medium between the investors and businesses, regardless of who’s the user and the supplier.
- It allows the related parties to save liquid assets value and encourage more and more investment opportunities.
- It ensures the fair distribution of liquid assets which is on a level scarce to a nation.
- It simultaneously allows the trade of debt, equity, and venture capital which moves toward infrastructure development in the socioeconomic backgrounds.
- The market encourages partnership initiatives more than a sole proprietorship, rather it is a public or private firm.
- By controlling the liquid securities and assets, the capital market prevents the cash flow imbalance and the inflation-deflation situation in the economy.
Are Capital and Financial Markets The Same?
The capital market and the financial market are part of the same industry but certainly not the same. The financial market also functions as an intermediary for trading securities, assets, documents, and exchange contracts, but the criteria aren’t limited to liquid assets/securities only. They consist of several secondary markets to originate profitable trading.
But the capital market has the means to raise funds for businesses. It involves the common public first in the primary market to raise the funds and then the tradeoffs happen in the secondary market. Many consider the capital market to be a part of the financial market. That is because the financial market functions on a broad range. And it is so much bigger than the capital market. Even so, they are two different concepts in the context of national and global economies.
Bottom Line
The Capital market fuels Startups, expansions, and financial risk corporations. From small to large, every business that exists in the economy is subject to the capital market. It encourages public-private partnerships and investments. According to the World Bank, to reach sustainable development goals in the economy and business industry.
The capital market works in two stages. First in the primary market where the liquid assets are generated and distributed by the supplier themselves to general people or a specific group of people. Then those already traded securities are bought and sold in the secondary market for substantial investors to get on board. So, This is the capital market that encourages investment and controls the liquid assets in the market.
Nishat Tarannum Mridula is a contributing writer at The Strategy Watch. She has been contributing for last two years.
Nishat is currently studying at the University of Dhaka. Even though her major is in Banking, she enjoys writing on diverse topics, starting from appliances to blogposts. She is in the middle of completing her BBA from University of Dhaka. Alongside that, she writes different types of business articles for The Strategy Watch.