Capital markets definition
/What are Capital Markets?
A capital market is an organized market in which both individuals and business entities buy and sell debt securities and equity securities. It is designed to be an efficient way to enter into purchase and sale transactions. This market is a key source of funds for an entity whose securities are permitted by a regulatory authority to be traded, since it can readily sell its debt obligations and equity to investors. Governments also use capital markets to raise funds, typically through the issuance of long-term bonds. Governments do not issue shares, and so cannot issue equity securities.
Capital markets are highly interconnected, so a disturbance in a capital market on the other side of the globe will likely impact trading in markets located in other countries.
Related AccountingTools Courses
Primary and Secondary Market Activity
A capital market is intended to be for the issuance and trading of long-term securities. When a publicly held company sells its securities in the capital markets, this is referred to as primary market activity. The subsequent trading of company securities between investors is known as secondary market activity. Short-term securities are traded elsewhere, such as in the money market.
Examples of Capital Markets
Examples of highly organized capital markets are the New York Stock Exchange, American Stock Exchange, London Stock Exchange, and NASDAQ. Securities can also be traded "over the counter," rather than on an organized exchange. These securities are usually issued by entities whose business fundamentals (such as revenue, capitalization, and profitability) do not meet the minimum standards of a formal exchange, which forces investors to use other avenues to trade the securities.
Regulation of Capital Markets
The Securities and Exchange Commission (SEC) is an example of a federal-level agency that regulates the reporting of information by any entity that wishes to issue securities in a capital market, or have its securities traded in a capital market.