Description
The primary market is where new securities (stocks and bonds are the most common) are issued. The corporation or government agency that needs funds (the borrower) issues securities to purchasers in the primary market
Structure of Capital Markets
Primary markets:
The primary market is where new securities (stocks and bonds are the most common) are
issued. The corporation or government agency that needs funds (the borrower) issues
securities to purchasers in the primary market. Big investment banks assist in this issuing
process. The banks underwrite the securities. That is, they guarantee a minimum price for a
business's securities and sell them to the public. Since the primary market is limited to issuing
new securities only, it is of lesser importance than the secondary market.
Secondary market:
The vast majority of capital transactions, take place in the secondary market. The secondary
market includes stock exchanges (like the New York Stock Exchange and the Tokyo Nikkei),
bond markets, and futures and options markets, among others. All of these secondary markets
deal in the trade of securities.
Securities:
The term "securities" encompasses a broad range of investment instruments. Investors have
essentially two broad categories of securities available to them:
1. Equity securities (which represent ownership of a part of a company)
2. Debt securities (which represent a loan from the investor to a company or government
entity).
Equity securities:
Stock is the type of equity security with which most people are familiar. When investors
(savers) buy stock, they become owners of a "share" of a company's assets and earnings. If a
company is successful, the price that investors are willing to pay for its stock will often rise and
shareholders who bought stock at a lower price then stand to make a profit. If a company does
not do well, however, its stock may decrease in value and shareholders can lose money. Stock
prices are also subject to both general economic and industry-specific market factors. In our
example, if Carlos and Anna put their money in stocks, they are buying equity in the company
that issued the stock. Conversely, the company can issue stock to obtain extra funds. It must
then share its cash flows with the stock purchasers, known as stockholders.
Debt securities:
Savers who purchase debt instruments are creditors. Creditors, or debt holders, receive future
income or assets in return for their investment. The most common example of a debt
instrument is a bond. When investors buy bonds, they are lending the issuers of the bonds their
money. In return, they will receive interest payments (usually at a fixed rate) for the life of the
bond and receive the principal when the bond expires. National governments, local
governments, water districts, global, national, and local companies, and many other types of
institutions sell bonds.
doc_871909355.docx
The primary market is where new securities (stocks and bonds are the most common) are issued. The corporation or government agency that needs funds (the borrower) issues securities to purchasers in the primary market
Structure of Capital Markets
Primary markets:
The primary market is where new securities (stocks and bonds are the most common) are
issued. The corporation or government agency that needs funds (the borrower) issues
securities to purchasers in the primary market. Big investment banks assist in this issuing
process. The banks underwrite the securities. That is, they guarantee a minimum price for a
business's securities and sell them to the public. Since the primary market is limited to issuing
new securities only, it is of lesser importance than the secondary market.
Secondary market:
The vast majority of capital transactions, take place in the secondary market. The secondary
market includes stock exchanges (like the New York Stock Exchange and the Tokyo Nikkei),
bond markets, and futures and options markets, among others. All of these secondary markets
deal in the trade of securities.
Securities:
The term "securities" encompasses a broad range of investment instruments. Investors have
essentially two broad categories of securities available to them:
1. Equity securities (which represent ownership of a part of a company)
2. Debt securities (which represent a loan from the investor to a company or government
entity).
Equity securities:
Stock is the type of equity security with which most people are familiar. When investors
(savers) buy stock, they become owners of a "share" of a company's assets and earnings. If a
company is successful, the price that investors are willing to pay for its stock will often rise and
shareholders who bought stock at a lower price then stand to make a profit. If a company does
not do well, however, its stock may decrease in value and shareholders can lose money. Stock
prices are also subject to both general economic and industry-specific market factors. In our
example, if Carlos and Anna put their money in stocks, they are buying equity in the company
that issued the stock. Conversely, the company can issue stock to obtain extra funds. It must
then share its cash flows with the stock purchasers, known as stockholders.
Debt securities:
Savers who purchase debt instruments are creditors. Creditors, or debt holders, receive future
income or assets in return for their investment. The most common example of a debt
instrument is a bond. When investors buy bonds, they are lending the issuers of the bonds their
money. In return, they will receive interest payments (usually at a fixed rate) for the life of the
bond and receive the principal when the bond expires. National governments, local
governments, water districts, global, national, and local companies, and many other types of
institutions sell bonds.
doc_871909355.docx