If you’re new to investing and want to find out about the types of capital markets, don’t look any further. In this article, we’ve covered everything that an investor needs to know, including classification and types.
The capital market serves as a crucial bridge between savers and investors. So, what exactly is the capital market? Well, it is a market for the trade of long-term investments, especially those which have lock-in or maturity periods of more than a year.
It involves the sale and purchase of both equity and debt instruments, including equity shares, secured premium notes, debentures, preference shares, and zero-coupon bonds. Besides, a capital market and its types deal with all forms of financial transactions involving the lending and borrowing of investment instruments.
Let’s learn more about the classification of the capital market and its types and also explore its role. A capital market tends to aid in the mobilisation of savings for the financing of long-term investments. It also includes the trading of securities. Moreover, it reduces the transaction and information cost by encouraging investors to own a broad spectrum of productive financial assets. It also facilitates the quick valuation of shares and debentures. More simply put, a capital market is a platform on which savings and investments are transferred between organisational investors and those in need of capital such as businesses, governments, and individuals.
It’s now time to explore the two main types of capital markets—primary and secondary. The most common capital markets are the stock market and the bond market.
Primary capital market: In this type of capital market, entities such as companies, governments, and public-sector institutions raise funds through issued bonds. Primary capital markets consist of corporations that raise money through the selling of new stocks through an initial public offering (IPO). Therefore, in a primary capital market, specific investors purchase securities directly from the issuing company. Primary markets are characterised by the trade of new issues of stocks and other securities. An example of this would include a company going public and selling its stocks and bonds to large-scale as well as institutional investors like hedge funds and mutual funds.
Secondary capital market: In the secondary capital markets, financial and investment instruments such as stocks, shares, and bonds, among others, are purchased and sold by customers. A secondary capital market is chiefly characterised by the exchange and trade of existing or previously-issued securities.
Stock exchanges such as the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), the New York Stock Exchange (NYSE), and NASDAQ are examples of secondary capital markets. The secondary market comprises investment venues that are overseen by a regulatory body such as the Securities and Exchange Commission (SEC) in which existing or already-issued securities are traded between investors. This means that issuing companies are not a part of the secondary market.
To sum it up, the goal of capital markets is to improve transactional efficiencies. For instance, a capital market brings together those who hold capital and those who seek money and provide a stage where these two parties can exchange securities.
Now that you’re aware of capital market basics, types of capital markets, and the advantages of a capital market, it’s time to start investing!