What is capital market? Well, it’s simply a term for any financial marketplace where investors buy and sell financial assets, such as stocks, bonds, equities, derivatives, mutual funds and so on. In simple terms, it can be defined as an exchange of financial obligations between corporations, mutual funds and other investors. In simpler terms, it’s the entire concept of buying and selling securities that drive the capital markets. However, capital markets are much more complex and intertwined with other financial markets like finance, banking, insurance and the exchange markets.
Capital markets refer to any financial markets where investors buy and sell financial securities. They differ from financial markets in that they do not generally involve any physical assets at stake. Rather, they are made up of financial contracts among a group of buyers and sellers. Essentially, they are an exchange of risks for rewards. The actual transactions involve two parties – the first investor buys financial instruments from the other investor, who offers them back (calls) and the other investor sell these same securities to the first investor.
For those unfamiliar with the term “capital market”, let’s start at the beginning. In simple terms, capital markets refer to any financial markets where investors buy and sell financial instruments, including stocks, bonds, equities, derivatives, mutual funds and so on. In essence, they are the entire concept of buying and selling securities that drive the capital markets. What is capital market then?
In general, capital markets exist to facilitate the exchange of risk-return trade. This means that any financial instrument that an investor owns is potentially the product of two possible outcomes – a high return on investment or a low return on investment. In order to facilitate this exchange, capital markets have been set up. In the US, for instance, there are currently approximately three dozen total exchanges, including two of the more popular, such as the NASDAQ and NYSE. However, there are numerous others throughout the world.
The purpose of these exchanges is to link the financial instruments of different investors together. This way, they are able to ensure that they are trading with similar interests and that their collective investment decisions reflect the overall investment objectives of their fellow investors. When you invest in the US stock market, for instance, your buying and selling interests are aligned with those of other investors. Consequently, you are effectively exchanging risk-fees for rewards. This transaction is what is known as a portfolio.
Of course, the very nature of the portfolio ensures that investors can reap the rewards that they make. As such, it is essential to understand what is capital market when we speak about these transactions. Basically, investors use capital to purchase financial instruments, which they will then use to produce income. For example, if you buy shares in a company, you will make money when they make money. You may also hold on to the stocks for a period of time, or even until they reach a certain price. However, the main point is that your overall return from holding on to the stocks is dependent on how well the company makes money.
Capital is usually measured in terms of its value, or face value. What is capital market, then, is the entire value of the portfolio held by the investor. We mentioned above the two major exchanges in the US, but there are others, including a few offshore exchanges. Therefore, you should make sure you are familiar with the different rates that are applied to capital.
If you are a new investor who wants to learn more about the dynamics of capital markets, you could consider taking courses online or investing with a professional fund manager. The key issue here is to remember that capital markets are an abstract model of the financial instruments you can invest in. To get a real feel for how capital markets work you would be well advised to look at actual examples rather than theoretical models. The history of financial markets is long and complicated, so it is impossible to cover it in one article. If you want to get a good grounding in the topic of what is capital market you should spend some time learning as much as you can about various models and their uses, and also try and develop some practical investment strategies based on these models.