We explain what the capital market is and its purpose. We also explain its characteristics, types of securities and more.
The capital market allows the exchange of private documents with financial value.
What is the capital market?
The capital market is a financial space in which securities and long-term debts of companies listed on the stock exchange are bought and sold.
A company can be listed on the stock exchange in two ways:
- If the company sells its securities, such as stocks and bonds, to the public.
- If the company took out a loan and must pay off the debt.
Various investors can participate in the growth of the company in exchange for profitability, that is, a rate of return or economic benefit.
The concept of worth In the capital market, it is any title that contains a private right, of a financial or patrimonial nature, and that can be put up for sale on the capital market.
For example: Company shares are documents that detail the percentage of ownership of the company that an individual has.
The securities market exchanges securities and the capital market exchanges money that circulates through credits or loans. Both variants are part of the same financial market.
Companies have two alternatives to expand:
- Issue “negotiable securities”. They are financial instruments that represent the ownership of certain rights for those who buy them and that are transferable in the markets.
For example: “Negotiable bonds” are debts that companies take on when they request a loan and which they agree to pay off with interest within a certain time. The interest generated from the debt forms part of the profit for investors, that is, those who participated in a portion of the total loan. - Participate in the stock marketIt is a way to bring a large amount of capital into the company through the sale of its shares.
For example: If the company needs a contribution from shareholders and one of them cannot contribute, he will be forced to sell his shares to another shareholder or a person outside the organization. Those who have shares own part of the company, so new investors who buy shares also become owners of a portion of the company.
Objective of the capital market
The main one aim of the capital market is the economic development of the different productive sectorsbecause it promotes the exchange of negotiable securities, open to the public, to generate long-term liquidity.
The capital market allows the savings of individuals and organizations to be put into motion so that they can be invested, activate productive sectors and generate profits.
Conceptual map of the capital market
Characteristics of the capital market
The wealth of investors and savers circulates in the capital market and is used to increase production and the development of the economy, in exchange for a profit for lending or investing their money.
The main characteristics of the capital market include:
- Open public participation in the exchange of values contributes to economic development.
- The variety of investment alternatives, short and long term.
- The diversity in the possibility of generating liquidity, with a variable return depending on the risk level of the investment.
- Speculation and price volatility in the market are conditioned by the risks of the financial context of each country and by the global economy.
- The risk of an investment being profitable will depend on the conditions of the exchange and the profit margin that is intended to be achieved in a given time.
Types of securities
The main types of securities that can be exchanged in the financial market are:
- The actions. These are the parts into which a company’s capital is divided. The total of all the shares is the capitalization or value of the company on the market. Therefore, the shares are of variable income, because they vary with the economic performance and profitability of the company. In addition, each person who owns a share owns a percentage of the organization and enjoys rights such as receiving dividends according to the company’s policies, access to information on the accounting balance sheets or attending board meetings.
- The bonds. These are documents that have a certain term and promise a payment value. They are fixed-income securities, meaning that their yield is fixed or is maintained during the term of the security. They can be corporate bonds (which are issued by companies) or sovereign bonds, also called public securities (which are issued by the State).
- Negotiable obligations. These are documents issued by companies based on their debts or interests after requesting a loan from different investors, such as individuals, banks or organizations. They have a specific medium or long-term validity so that the company can pay off the debt and the respective interests. The return that each investor will obtain is equivalent to the interest that the company will pay for the money lent, which is equivalent to the negotiable obligations.
Intermediaries in the capital market
Intermediaries are legal entities, professionals or institutions that have knowledge of the financial market and provide financial advisory services. They are the ones that directly carry out the exchanges and transactions of securities for different investors.
For exampleStockbrokers and securities dealers are individuals who represent financial institutions, such as banks, that are responsible for advisory and trading, that is, the buying and selling of securities for investors and savers.
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References
- De la Torre, T. (2019). Differences between capital market and stock marketfrom: https://www.inesem.es
- Bulat, S. (2022). What is the path followed by companies that go public? . La Nación newspaper, Economy section, from: https://www.lanacion.com.ar/
- Jaffe, JF, Ross, S.A., & Westerfield, R.W. (1997). Corporate Finance. McGraw Hill. Mexico.