We explain what the capital market is and its objective. In addition, we explore its characteristics, types of securities, and more.
What is a capital market?
A capital market is a financial space in which long-term securities and debt of listed companies are bought and sold.
A company can be listed on the stock market in two ways:
- If the company sells its securities such as stocks and bonds to the general public.
- If the company acquires a loan and must repay the debt.
Investors can participate in a company’s growth in exchange for return on investment, that is, a rate of return or economic profit.
The concept of security in the capital market refers to any financial asset containing a private right, of either a financial or equity type, which can be traded in the capital market.
For example: A company’s shares are certificates that state the percentage of ownership of a company held by a person.
While the stock market trades securities, the capital market exchanges money that is channeled through credits or loans. Both are part of the financial market.
Businesses have two alternatives for expansion:
- Issuing “marketable securities”. They are financial instruments that represent ownership of certain rights for the buyer and are transferable in the markets.
For example: “negotiable obligations” are debts incurred by companies when borrowing money, which they guarantee to repay with interest over a specified period. The interest generated from this debt is part of the profit for investors, i.e. those who participate in a percentage of the total loan.
- Stock market participation. It is a way to bring in a large amount of capital to the company through the sale of its shares.
For example: If a company needs a contribution from shareholders and one fails to contribute, they will be forced to sell their shares to another shareholder or a person outside the organization. Shareholders own a percentage of the company; thus new investors buying shares also become owners of a percentage of the company.
- See also: Free market
Objective of the capital market
The main objective of the capital market is the economic development of the different productive sectors, as it promotes the exchange of marketable securities available to the general public to generate long-term liquidity.
The capital market allows individuals and organizations to invest their savings, stimulating productive sectors, and generating profits.
Characteristics of the capital market
Wealth from investments and savings is channeled in the capital market, which is used to increase production and boost the economy, in return for profit for lending or investing their money.
The main characteristics of the capital market include:
- General public participation in securities trade contributes to economic growth.
- A variety of short and long-term investment alternatives.
- Liquidity diversification, with return values based on investment risk.
- Speculation and market price volatility are influenced by a country’s financial context and the global economy.
- Investment risk depends on the exchange conditions and the intended profit margin for a specific period of time.
Types of securities
The main types of securities that can be traded in the financial market are:
- Shares. They are units into which the capital of a company is divided. The total of all shares is the company's market capitalization or market value. Thus, shares are variable income, since their price fluctuates with a company's economic performance and profitability. In addition, each shareholder owns a percentage of the company and has rights such as receiving dividends according to company policies, accessing company financial statement, or attending board meetings.
- Bonds. They are certificates that have a fixed maturity and state a payment price. They are fixed-income securities, i.e. either their return is fixed or their price remains fixed until their maturity date. They can be corporate bonds (which are issued by companies) or sovereign bonds, also called government securities (which are issued by the State).
- Negotiable obligations. They are documents issued by companies based on their debts or interests after requesting a loan from various investors, such as individuals, banks or organizations. They have a fixed medium or long-term maturity for the company to repay debt plus interest. The return that each investor will obtain is equivalent to the interest that the company will pay on the loan, which is in turn equivalent to the negotiable obligations.
Capital market intermediaries
Intermediaries are legal entities, professionals, or institutions that are knowledgeable about the financial market and provide financial advisory services. They carry out securities exchanges and securities transactions for investors.
For example: Stockbrokers and securities agents represent financial institutions like banks, and are responsible for advising and trading, i.e. buying and selling securities for investors and savers.
- De la Torre, T. (2019). Diferencias entre mercado de capitales y mercado de valores. https://www.inesem.es.
- Bulat, S. (2022). ¿Cómo es el camino que transitan las empresas que salen a cotizar en bolsa? [en línea]. Diario La Nación sección Economía. https://www.lanacion.com.ar/.
- Jaffe, J. F., Ross, S. A., & Westerfield, R. W. (1997). Finanzas corporativas. McGraw Hill. México.