Capital Market

The capital market is a financial market where individuals and institutions buy and sell financial securities such as stocks, bonds, and other long-term investment instruments. It serves as a platform for raising capital and investing in businesses, governments, and other entities. Capital markets are essential for the functioning of an economy, as they facilitate the efficient allocation of resources and the transfer of funds from savers to borrowers.

There are two primary segments within the capital market:

1. Primary Market: In the primary market, newly issued securities are sold to the public for the first time. This is where companies raise capital by issuing new stocks or bonds. For example, when a company goes public by conducting an initial public offering (IPO), it offers its shares to investors in the primary market.

2. Secondary Market: The secondary market is where existing securities, previously issued in the primary market, are traded among investors. Stock exchanges, like the New York Stock Exchange (NYSE) and the NASDAQ, are examples of secondary markets where investors buy and sell shares of publicly traded companies. Bond markets, such as the U.S. Treasury bond market, also operate in the secondary market.

Here's an example to illustrate the capital market:

Company XYZ wants to expand its operations and needs to raise funds for this purpose. To do so, it decides to issue new shares of stock to the public. Company XYZ works with investment banks to underwrite the offering and set the initial price for the shares. These new shares are made available to investors through an IPO in the primary market. Individual and institutional investors can purchase these shares in the primary market, and the proceeds from the sale go directly to Company XYZ.

Once the IPO is completed, the shares of Company XYZ are traded on a stock exchange like the NYSE or NASDAQ in the secondary market. Investors can buy and sell these shares among themselves. The price of Company XYZ's shares fluctuates based on supply and demand, as well as various factors affecting the company's performance and outlook. This trading in the secondary market allows investors to exit their positions, buy additional shares, or trade with other investors.

In this example, the capital market encompasses both the primary and secondary markets, enabling Company XYZ to raise capital and investors to trade and invest in its shares.