Capital market Meaning – Instruments Traded, Functions And Classification
The capital market can be defined as a financial market where long term financial instrument are traded. These instrument are either bought or sold in the market, this market brings together both the supplier and buyers of long term finances for instrument.
The Rationale For The Capital Market (Theory And Examples)
The rationale for the establishment of the capital market can be said to be the same reason why the short term finance market was established, on this articles, I have decided to pen down the some of the rationale why the capital market was established;
- The capital market enables the government to mobilize long term capital for the economic development of the country.
- The capital market helps the international establishments with a medium to provide financial securities while at the same time provide an avenue for the locals to own shares in the firms.
- The market also encourage borrowing and lending on long term basis. These opportunities are for locals.
- This is a medium to facilitate new capital from the market.
- This is to propagate a regulatory scheme to check abuses and regulate the activities of the operators in the market.
- The capital market encourages a healthy environment for the participation and co-operation of indigenous firms, this in turn develops the local economy for the benefit and mutual advantage of all.
Instruments Traded In the Capital Market
There are a lot of article of trade traded in the capital market, these includes the following;
- Equity and preference share
- Bonds; mostly offered by the government.
- Gilt-edged… etc
The major players in this market are the Banks, Brokerage firms, Investment or the finance houses and other non-bank financial, mortgage banks, the government, insurance firms, pension organization… etc.
Functions Of The Capital Market
The financial capital market has a few functions and below are a couple I have penned down;
- This financial hub provides liquidity for long term investment for both the local and foreign investors.
- Through the instrument of capital market, there is a proper allocation of the countries real and financial resources among various economic units.
- It is a medium for broadening the ownership base, from the erstwhile family dominated firms, to the general public.
- It is a means of achieving the indigenisation policy of the government.
Classification Of The Capital Market (Types Of Capital Market)
The capital market is classified into two major sub-division, they are the primary market and the secondary market;
The Primary market – the primary market is a section in the capital market where new financial securities are floated for subscription. In simple terms, the primary market can be aid to the market for the quotation of new issues of security.
Secondary market – this is the market where financial securities that have been fully subscribed and paid for are offered for sale. This simply implies that this is a market for the transfer of ownership of shares, debentures stock and bonds.
The fact remains that the secondary market has little or no effect on the creation or the allocation of newly created wealth in other words these are the new security, although it still supports the primary market thus;
- Prices determined in this market have substantial influences in determining the prices of expected new issues in the primary market.
- It enables individuals and institutions to allocate and reallocate the financial assets holdings any time, through the stock exchange major operators.
The Interrelations Of The Money And Capital Market Instruments
The money market provides the required means for the easy and reliable transfer of short term debt instruments used in financing the needs for the various economic units and sectors.
The capital market is the complex institution and mechanism whereby medium and long term funds are pooled together and made available to economic units.
Meanwhile, these are a few situations where the both markets can complement each other, as can be seen below;
- Fund can be generated or obtained from either of the two markets.
- Both market operate in the level where there is a to and fro flow of funds between the market.
- The markets can serve as a medium where participants can obtain facilities like the dealer in the short term government security also buy and sell long term bonds just as commercial banks grant both medium and short term loans.
- The return on investment in both market which includes the short term and long term are positively related, this is to say when there is a positive rise in short term interest rate, same is going to happen to the long term interest rate.
- Fund surppliers have the option of directing such funds to any of the markets.
Foreign Exchange market (FOREX)
The forex is another sector of the financial international market where foreign currencies are traded. This market afford the individuals, firms and countries to access exchange using domestic currencies as using financial assets for currency and financial assets of other countries of the world. In simple terms, this market facilitate the international exchange of good and exchange of goods and services as in the case of international trade.
Instruments Traded In The FOREX Market
Majorly, the instruments required are the domestic and international currencies, money and postal orders, travellers cheque, visas, shares, money transfer, bonds, debentures, draft, bureau de change, commercial merchant… etc.
An important feature of this market is that it enables commercial activities am other important business transaction among the committee of nation across the globe. At one time or the other countries need themselves to thrive, this market provides the avenue for countries to have access to other countries resources.
The Insurance Market
In conclusion to this article, we will consider the insurance market among other financial markets as we have treated already. The insurance market is a provision against any type of risk, and the uncertain loss, in this case financial risk. Like it has been rightly defined that insurance is a contractual agreement binding on the insured and insurer, where the insured pays a certain amount of money as premium in return for a compensation by the insurer.
Functions of Insurance Firms In The Capital Market
- In the capital market, the insurance companies functions as the underwriters.
- They mobilise financial resources as they encourage people to save the money.
- They facilitate the transfer of risk.
- They help to develop the financial market through their life and pension business.
- Their accumulated funds can be used for long term investment, thereby facilitating the process of capital formation.
- They are involved in the international trade insurance by helping to improve on the countries balance of payment position.
- Their policies can serve as a collateral for bank loans.
The financial capital market has and will always remain an integral part of both the developed and the developing economy.