Capital Market – Definition, Characteristics, and Benefits of Capital Market

The Capital Market is a category of the financial market where the purchase and sale of securities, financial assets of companies, and also, it carries out other economic units such as stocks, obligations, and long-term debt securities.

The capital market gives investors the possibility of participating as partners proportionally in the capital of the invested company.

In contrast, companies have the possibility of placing part of their capital among a large number of investors with the purpose of financing working capital and the expansion of the company.

Characteristics of the capital market

• When the investor buys securities (shares) of the company, he becomes a partner of the company in proportion to the capital he owns.
• There is a lot of liquidity in the capital market, so it is relatively easy to buy and sell securities.
• There is a risk in the investment since it is a market of variable returns, that is to say, there is a lot of volatility in the prices of the titles.
• There is no guarantee of obtaining benefits.
• There is no specific deadline for buying and selling securities, and each one chooses when to buy or sell.

Benefits and objectives of the capital market

• It can grant high profitability in the long term.
• It allows diversifying the irrigation of the investment portfolio.
• It allows access to the best companies in the world within a framework of legality and security.
• Establishes resources to finance companies in the productive sector of the economy.
• It proffers a wide range of products with different associated risks according to the investment or financing needs of market participants.
• It reduces the costs of selecting and assigning resources to productive activities.

Classification of the capital market

Capital markets can be categorized according to different criteria:

Capital market based on the assets traded in them

• Stock market fixed income and bonds, or equity shares.
• Long-term credit market: loans and bank credits.

Capital market based on its structure

• Organized market: that official regulated and supervised market.
• OTC Market (Over The Counter): that market where the negotiation is carried out directly between the parties, presents a higher risk.

Capital market depending on the time.

• Primary or issuance market: the one where the securities issues are transmits for the first time.
• Secondary market: the one where the successive purchase-sales of the securities already issued in the primary market have made.

Which parties participate in the capital market

Institutions of the financial system that regulate and complement the operations of that market are involved in the capital market:

Stock Exchange

• The  Stock Exchange is responsible for providing operational structure to carry out financial operations, in addition to recording and monitoring the movements of bidders and resource claimants.
• It is also up to him to give faith in the quotes and to inform the investor about the financial and economic situation of the company in which they have invested and their financial instruments.

Issuing Entity

• These are entities that place shares – aliquot of the share capital – or obligations to access investor resources. The issuing entities may be public limited companies, the same government, credit institutions, or decentralized public entities. This also according to the regulations of each country in its capital market.

Intermediaries

• They  are responsible for carrying out the operations of purchase and sale of shares, and to manage portfolios and investment portfolio of third parties.

Investors

• Investors differentiate between Natural person Legal person Foreign investor Institutional investor Qualified investor. The investor, when buying the stock-shares – becomes a partner of the company from which he buys shares in proportion to what he has invested.
• But in turn, this type of markets offers a greater risk when investing because there are high yields but very variable, which is added as we mentioned price volatility, and there is no guarantee of obtaining benefits.