What are capital markets? Definition and meaning
Capital markets are financial markets where long-term debt or equity-backed securities are bought and sold.
These markets direct the funds of savers to those who can put them to long-term productive use, such as governments and corporations making long-term investments.
Securities might be issued by a business in the form of bonds or shares to raise money. Other entities, such as regional or national governments in need of long-term cash, may also issue bonds.
In capital markets, money is raised for periods longer than one year.
They are monitored by financial regulators in most countries – examples include the US Securities and Exchange Commission (SEC) and the UK’s Bank of England.
Much of people’s savings and pension contributions end up buying shares and bonds in capital markets.
Capital markets should not be confused with money markets, where financial instruments with maturities not exceeding one year are traded. Money markets and capital markets are part of the financial markets.
Primary and secondary markets
New stock (shares) and bonds are issued to investors in the primary market, often through a mechanism known as underwriting, while existing securities are traded in the secondary market. Most of the activity in the capital markets occurs in the secondary markets.
Most governments use investment banks to organize the sale of their bonds.
Capital markets are crucial to the proper-functioning of an economy – economic output relies on capital.
Several entities participate in capital markets, including pension funds, mutual funds and other institutional investors, individual investors, local and national governments, businesses, organizations, as well as banks and financial institutions.
Investors seek the best possible return for their money at the lowest possible risk, while the issuers of securities aim to raise capital at the lowest possible cost.
Examples of highly-organized capital markets are the New York Stock Exchange, the London Stock Exchange, NASDAQ, and the Tokyo Stock Exchange (東京証券取引所).
Capital markets across the globe are highly interconnected. Any disturbance in a capital market in one nation usually has an impact on all the trading markets in other countries.
The Nasdaq Business Glossary says the following about capital markets:
“Traditionally, this has referred to the market for trading long-term debt instruments (those that mature in more than one year). That is, the market where capital is raised. More recently, capital markets is used in a more general context to refer to the market for stocks, bonds, derivatives and other investments.”