capital market
Definition
Financial market that works as a conduit for demand and supply of (primarily) long-term debt and equity capital. It channels the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees through a variety of financial instruments (bonds, notes, stocks) called securities.
A capital market is not a compact unit, but a highly decentralized system made up of three major parts: (1) stock market, (2) bond market, and (3) money market. It also works as an exchange for trading existing claims on capital in the form of shares.
The capital market is divided in two different markets. These are the primary capital market and secondary capital market. The primary capital market is concerned with the new securities which are traded in this market. This market is used by the companies, corporations and the national governments to generate funds for different purpose.
The primary capital markets is also called the New Issue Market or NIM. The securities which are introduced in the market are sold for first time to the general public in this market. This market is also known as the long term debt market as the money raised from this market provides long term capital.
The process of offering new issues of existing stocks to the purchasers is known as underwriting. At the same time if new stocks are introduced in the market, it is called the Initial Public Offering. The act of selling new issues in the primary capital market follows a particular process. This process requires the involvement of a syndicate of the securities dealers. The dealers who are running the process get a certain amount for as commission.
The price of the security offered in the primary capital market includes the dealer,s commission also. Again, if the issue is a primary issue, the investors get the issue directly from the company and no intermediary is needed in the process. For the purpose, the investor needs to send the exact amount of money to the respective company and after receiving the money, the particular company provides the security certificates to the investors.
The primary issues which are offered in the primary capital market provide the essential funds to the companies. These primary issues are used by the companies for the purpose of setting new businesses or to expanding the existing business. At the same time, the funds collected through the primary capital market, are also used for the modernization of the business. At the same time, the primary capital market is also involved in the process of creating capital for the respective economy.
There are three ways of offering new issues in the primary capital market. These are:
• Initial Public Offering
• Preferential Issue.
• Rights Issue (For existing Companies)
Primary bomd mkt.
The bond market is a part of the capital market. It is divided in two different types known as the primary bond market and the secondary bond market. The primary bond market is also termed as debt market, credit market and fixed income market. In the primary bond market, the companies or the government offer the new bonds and the fund generated through the process goes to the issuer of the bond.
The total size of the global bond market is about $45 trillion. The United States of America shares a major portion of the global bond market revenue. There is a certain process of offering these bonds for the first time in the primary bond market. The process of offering bonds to the public are similar to the offering of the stock. For the purpose of offering bond in the primary market, a company or a firm needs to take help of an investment bank. The investment bank provides all the necessary experience and expertise for the purpose. The investment bank provides its suggestions regarding the creation of the issue. At the same time, the bank also provides an estimate of the expected yield from the issue. The maturity period of the bond is also suggested by these banks. The bank also helps in selling the bonds in the primary bond market. At the same time, the bank may also purchase the whole issue through firm commitment underwriting.
For the marketing of the new issue in the primary bond market, the investment bank uses its own network. The bank forms a syndicate or at certain times, forms a selling group, to sell the bonds to the investors through the primary bond market. The institutional investors or the individual investors lends their money to the particular company through these bonds. Once these are purchased from the primary bond market, these can be further traded in the secondary bond market.
These bonds provide a fixed income source to the investor. At the same time, the offering companies or the government also gets the very necessary money for their projects.
The stock market is divided in two different markets known as the primary equity market and the secondary equity market. The primary equity market is used for offering new equity issues in the market. This market provides the companies the source of generating funds for the business purpose. At the same time, the primary equity market along with the secondary market help the investors to get a share in the company which is offering the shares. The investor can also make good amount of money from this market.
The primary equity market is also termed as the New Issue Market or NIM because the Initial Public Offerings are meant for this market. This market is a source of long term debt for the companies and because of this, the market can also be termed as long term debt market. The securities which are designed for the public and are introduced through the primary equity market are of two types. When any new stock is introduced in the market, it is called the Initial Public Offering. At the same time, offering new issues of existing stocks to the purchasers are known as underwriting. The growing number of companies offering IPOs in the primary equity market represents the growth of the global equity market itself. The growth of the primary equity market is dramatic in the developed countries and at the same time. The number of IPOs are rising in the developed countries. Along with this, the mechanism of the primary equity markets has also developed and the competition between various primary equity markets are rising rapidly. This growth of the IPOs also represent the fact that the companies are preferring to generate funds through the primary equity market than to go to the financial organizations or commercial banks.
Introducing of IPOs in the primary equity market is done through a particular process. According to this process, a syndicate of the securities dealers should perform the job. Because of their services the securities dealers receive a certain amount of money as their commission. The price on which the IPO is offered in the primary equity market includes the dealer's commission also.