A capital market is a financial market where long-term debt (more than a year) or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can use them for long-term productive use, such as companies or governments that make long-term investments. Financial regulators such as the Bank of England (BoE) and the US Securities and Exchange Commission (SEC) oversee the stock market to protect investors against fraud, among other tasks.
Modern capital markets are almost always inhabited on computer-based electronic commerce systems; most can only be accessed by entities in the financial sector or government and corporate finance departments, but some can be accessed directly by the public. There are thousands of such systems, mostly serving only a small part of the overall capital market. System hosting entities include stock exchanges, investment banks, and government departments. Physically, the system is organized around the world, although they tend to be concentrated in financial centers such as London, New York, and Hong Kong as well.
Video Capital market
Definisi
Capital markets can be either primary or secondary markets. In the primary market, new shares or bonds are sold to investors, often through a mechanism known as a guarantee. The main entities that seek long-term funds in the primary capital market are the government (which may be municipal, local or national) and business firms (companies). The government only issues bonds, while companies often issue equities and bonds. The main entities that buy bonds or shares include pension funds, hedge funds, government wealth funds, and less wealthy individuals and investment banks are trading on their own behalf. In the secondary market, existing securities are sold and bought among investors or traders, usually on the exchange, over-the-counter, or elsewhere. The existence of a secondary market increases investors' willingness in the primary market, as they know they are likely to rapidly withdraw their investments if necessary.
The second important division falls between the stock market (for equity securities, also known as stocks, where the investor acquires ownership of the company) and the bond market (where the investor becomes the creditor).
Versus the money market
The money market is used to raise short-term finances, sometimes for loans that are expected to be paid back as early as the night. In contrast, the "capital market" is used to raise long-term finances, such as stock purchases/shares, or for unexpected loans to be repaid for at least a year.
Funds borrowed from the money market are typically used for general operational costs, to provide liquid assets for short periods. For example, a company may have incoming payments from customers that have not been cleared, but require immediate cash to pay its employees. When a company borrows from the primary capital market, often the goal is to invest in additional physical capital goods, which will be used to help increase its revenue. It can take months or years before the investment results in sufficient returns to repay the costs, and hence the long-term finances.
Together, the money market and the capital market form the financial markets, because the term is understood narrowly. The capital market deals with long-term finance. In a broad sense, it consists of a series of channels through which public savings are available to industrial and commercial enterprises and public authorities.
Versus bank loan
Regular bank lending is usually not classified as a capital market transaction, even when the loan is extended for a longer period of time than a year. First, regular bank loans are not securities (ie they do not take the form of resellable security such as shares or bonds that can be traded in the market). Second, loans from banks are more regulated than capital market loans. Third, bank depositors tend to be more risk averse than capital market investors. These three differences all act to limit institutional lending as a source of finance. Two additional differences, this time favoring loans by banks, are that banks are more accessible to small and medium-sized companies, and that they have the ability to create the money they lend. In the 20th century, most of the company's finances apart from the issue of shares raised by bank loans. But since about 1980 there was an ongoing trend for disintermediation, where large and credit-worthy companies have found that they should effectively pay less interest if they borrow directly from the capital market rather than from the bank. The tendency of companies to borrow from the capital markets rather than banks has been very strong in the United States. According to the Financial Times, the stock market took over bank loans as a major source of long-term financing in 2009, reflecting risk aversion and bank regulation amid the 2008 financial crisis.
Compared in the United States, companies in the EU have a greater dependence on bank loans for funding. Efforts to enable companies to increase funding through capital markets are coordinated through the EU Capital Markets initiative.
Maps Capital market
Example
Government in primary market
When the government wants to improve long-term finance, it will often sell bonds in the capital market. In the 20th and early 21st centuries, many governments will use investment banks to manage the sale of their bonds. Leading banks will bear bonds, and often lead brokers syndicates, some of which may be based in other investment banks. The syndicates will then be sold to various investors. For developing countries, multilateral development banks will sometimes provide an additional layer of underwriting, so risk is shared between investment banks, multilateral organizations, and final investors. However, since 1997 it has become increasingly common for governments of major countries to pass investment banks by making their bonds available immediately for online purchases. Many governments now sell most of their bonds with computer auctions. Typically, large volumes are put up for sale all at once; the government can only hold a small number of auctions every year. Some governments will also sell sustainable bonds through other channels. The single largest seller of debt is the US government; there are usually several transactions for such sales every second, which corresponds to the continual updates of the US real-time debt hour.
Company in primary market
When a company wants to raise money for long-term investments, one of its first decisions is whether to do so by issuing bonds or shares. If he chooses a stock, he avoids an increase in his debt, and in some cases new shareholders may also provide non-monetary assistance, such as expertise or fruitful contact. On the other hand, the issue of new shares will dilute existing ownership rights of shareholders, and if they get a controlling interest, new shareholders can even replace senior managers. From the investor's point of view, stocks offer a higher potential return and capital gains if the company goes well. Conversely, bonds are safer if firms are not good, as they are less prone to severe price reductions, and in case of bankruptcy, bondholders can be paid something, while shareholders will not accept anything.
When a company improves finances from the primary market, the process is more likely to involve face-to-face meetings than any other capital market transaction. Whether they choose to issue bonds or stocks, companies will usually ask for investment bank services to mediate between them and the market. A team of investment banks often meet with senior managers of the company to ensure their plans are good. The bank then acts as a guarantor, and will set up a brokerage network to sell bonds or shares to investors. This second stage is usually done mostly through computerized systems, although brokers often call their preferred clients to give them advice about the opportunity. Companies can avoid paying fees to investment banks using direct public bidding, although this is not a common practice because it raises other legal costs and can take considerable management time.
Secondary market trading
Most of the capital market transactions take place in the secondary market. In the primary market, every security can only be sold once, and the process of creating a new stock or bond batch is often lengthy due to regulatory requirements. In the secondary market, there is no limit to how many times security can be traded, and the process is usually very fast. With the advent of strategies such as high-frequency trading, single security in theory can be traded thousands of times in an hour. Transactions in the secondary market do not directly improve finances, but they make it easier for companies and governments to increase finance in the primary market, because investors know that if they want to get their money back quickly, they will usually easily resell their securities. Sometimes, however, secondary market capital transactions can have a negative effect on major borrowers: for example, if most investors are trying to sell their bonds, this may push the yield for future problems from the same entity. Extreme examples occurred shortly after Bill Clinton began his first term as President of the United States; Clinton was forced to abandon some of the increased spending he promised in his election campaign due to pressure from the bond market. In the 21st century, some governments try to lock as much of their loans into long-term bonds, so they are less vulnerable to pressures from the market. Following the 2007-08 financial crisis, the introduction of quantitative easing further reduced the ability of private agents to increase government bond yields, at least for countries with central banks that could engage in substantial open market operations.
Different players are active in the secondary market. Individual investors account for a small percentage of trade, although the portion is slightly increased; in the 20th century most only a few wealthy people were able to buy accounts with brokers, but accounts are now much cheaper and accessible via the internet. Now there are many small traders who can buy and sell in the secondary market using a platform provided by brokers that can be accessed through a web browser. When such people trade on the capital market, it often involves a two-stage transaction. First they order with their broker, then the broker executes the trade. If trading can be done on exchange, the process will often be completely automated. If the dealer needs to intervene manually, this often means a greater cost. Merchants in investment banks often make transactions on behalf of their banks, as well as execute trades for their clients. Investment banks will often have divisions (or departments) called "capital markets": staff in this division try to remain vigilant against opportunities both in the primary and secondary markets, and will advise key appropriate clients. Pension funds and state property tend to have the greatest ownership, though they tend to buy only the lowest and most secured bonds and stocks, and some of them do not trade often. According to the 2012 Financial Times article, hedge funds are increasingly making the most of short-term trades in most stock markets (such as UK and US stock exchanges), which make it difficult for them to maintain high historical returns as they increasingly find themselves they trade with each other rather than with less sophisticated investors.
There are several ways to invest in the secondary market without buying stocks or bonds directly. A common method is to invest in mutual funds or exchange traded funds. It is also possible to buy and sell derivatives based on the secondary market; one of the most common types is contracts for differences - this can provide quick profits, but it can also cause buyers to lose more money than they originally invested.
Size
All given figures are in billions of US dollars and are sourced from the IMF. There is no universally recognized standard for measuring all these numbers, so other estimates may vary. GDP columns are included as a comparison.
Forecasting and analysis
Much work is done to analyze the stock market and predict their future moves. This includes academic studies; work from within the financial industry for the purpose of making money and reducing risks; and work by governments and multilateral institutions for regulatory purposes and understand the impact of the capital market on broader economies. Various methods ranging from the instinctive instinct of experienced traders, to various forms of calculus and stochastic algorithms such as Stratonovich-Kalman-Bucy filtering.
Capital control
Capital control is an action taken by a state government that aims to manage capital account transactions - in other words, a capital market transaction in which one of the opposing parties involved is in a foreign country. While domestic regulatory authorities try to ensure that capital market participants trade fairly with each other, and sometimes to ensure institutions such as banks do not take excessive risks, capital controls aim to ensure that the macroeconomic effects of the capital market have no negative impact. Most developed countries want to use capital controls sparingly if at all, as in theory that allowing free markets is a win-win situation for all involved: free investors to seek maximum returns, and the state can benefit from investments that will develop the industry and their infrastructure. However, sometimes capital market transactions can have a negative effect: for example, in a financial crisis, mass capital can be withdrawn, leaving a country without enough foreign exchange reserves to pay for the required imports. On the other hand, if too much capital flows into a country, it can increase inflation and the value of the country's currency, making its exports uncompetitive. Countries like India use capital controls to ensure that their citizens' money is invested at home rather than abroad.
See also
- Audit Quality Center (CAQ)
- Capital Market Setting Committee (United States)
- Financial markets
- Financial settings
- Stock market
Note
References
Source of the article : Wikipedia
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