Capital Market: An Overview

Wirral Metropolitan College Division of Accounting and Finance Student Name : Katie Watson Courses : Financial Management & Business Practices in Construction Category : Lecture Notes Credit Hours : 3 Credit Semester/Sessions : 4th, 2021/2022 Sessions Capital Market 1. Introduction to Capital market Capital market, also known as the securities market or stock market, is a marketplace where financial instruments such as stocks, bonds, and other securities are bought and sold. The capital market is divided into two main categories: primary market and secondary market. The primary market is where companies issue new securities to raise capital, while the secondary market is where previously issued securities are bought and sold. The capital market plays a critical role in the economy as it provides a platform for businesses to raise capital, individuals to invest their savings, and governments to finance public projects. The capital market also helps allocate resources efficiently by directing capital to businesses that have the most promising growth prospects. The stock market is one of the most widely known components of the capital market. In the stock market, investors can buy and sell shares of publicly traded companies, with the price of the shares determined by supply and demand. The stock market also provides a mechanism for companies to raise additional capital by issuing new shares through initial public offerings (IPOs). Another important component of the capital market is the bond market, where companies and governments can raise capital by issuing bonds. Bonds are debt securities that pay a fixed interest rate over a specific period, after which the principal is repaid. Investors can also participate in the capital market through mutual funds, which are pools of money collected from many investors that are invested in a diversified portfolio of stocks, bonds, or other securities. Mutual funds provide individual investors with access to a diversified portfolio and the expertise of professional fund managers. Overall, the capital market plays a critical role in the economy by facilitating the efficient allocation of resources and providing businesses and governments with access to capital. For individual investors, the capital market provides a platform to invest in a diversified portfolio of securities and potentially earn higher returns than traditional savings accounts. However, investing in the capital market also comes with risks, and it is important to carefully consider investment options and seek professional advice before investing. 2. Market types The capital market, also known as the securities market or stock market, is divided into different types of markets, each with its unique characteristics and functions. Here are the main types of capital market:    Equity market - The equity market, also known as the stock market, is where stocks and shares of publicly traded companies are bought and sold. When investors purchase shares in a company, they become partial owners of that company and are entitled to a share of the company's profits. The stock market provides a way for companies to raise capital by issuing shares through initial public offerings (IPOs). Debt market - The debt market, also known as the bond market, is where debt securities such as bonds, notes, and debentures are bought and sold. Companies and governments issue bonds to raise capital, with investors receiving interest payments in return for lending money. The debt market provides a way for investors to earn income by investing in fixed-income securities. Derivatives market - The derivatives market is where financial instruments such as options, futures, and swaps are traded. Derivatives are financial contracts that derive their value from an underlying asset such as stocks, bonds, or commodities. The derivatives market provides a way for investors to manage risk and speculate on the future price movements of assets.   Commodities market - The commodities market is where raw materials such as gold, oil, and agricultural products are bought and sold. Commodities are often traded as futures contracts, which allow investors to buy or sell a specific commodity at a predetermined price and date in the future. Foreign exchange market - The foreign exchange market, also known as the forex market, is where currencies are traded. The forex market is the largest financial market in the world and provides a way for investors to buy and sell different currencies in order to profit from changes in exchange rates. Overall, the different types of capital market provide investors with a range of investment options and opportunities. Each market has its unique characteristics, risks, and rewards, and it is important for investors to understand these before investing. By diversifying their investments across different markets, investors can potentially reduce their overall risk and achieve their financial goals. 3. Investing in the capital market Investing in the capital market, or commonly referred to as the stock market, is one of the most popular investment choices for individuals and institutional investors alike. It provides a platform for companies to raise capital by selling their shares to investors, while at the same time giving investors the opportunity to earn a return on their investment through capital appreciation and dividend income. To invest in the capital market, investors must first open a brokerage account with a registered brokerage firm. Once the account is opened, investors can begin to buy and sell stocks, bonds, and other securities listed on the stock exchange. Investing in the capital market involves taking on certain risks, including the possibility of losing some or all of your invested capital. However, investors can mitigate these risks by conducting thorough research on the companies they are interested in investing in and diversifying their portfolio by investing in a mix of different securities. There are two main types of investment strategies in the capital market: fundamental analysis and technical analysis. Fundamental analysis involves researching a company's financial health and industry trends to determine its intrinsic value, while technical analysis involves using charts and other technical indicators to predict a stock's future price movements. Investors can also choose between different investment styles, such as value investing, growth investing, or income investing. Value investing involves identifying undervalued stocks with strong fundamentals, while growth investing focuses on companies with strong growth potential. Income investing, on the other hand, prioritizes stocks with high dividend yields. Overall, investing in the capital market can be a lucrative way to grow your wealth over the long term, but it is important to understand the risks involved and to develop a sound investment strategy based on your financial goals and risk tolerance.