There are many different kinds of financial markets, and
each of them plays a different role in relation to each other and the investors
who use them. Among the many kinds of financial markets, the capital markets
are quite the most popular small and big time investors.
The capital markets are where companies and industries
acquire money that they require for the long term. There are two types of
capital markets, namely the primary and secondary market.
In this article, we will talk about the capital markets and
its two categories. If you’re eager to learn more about the market in which you
are probably a stock or bond investor, you need to read this article! Enjoy,
What are Capital Markets?
In general, you can think that there are broadly two types
of financial markets in an economy, namely the capital market and the money market.
The capital markets deal in financial instruments and commodities that are also
considered long-term securities. They usually have a maturity of at least more
than a year.
The capital markets basically have the same functions as the
money market. It serves a link between the savings /investors and the wealth
creators. The funds gotten can be used for productive purposes and create
wealth in the economy in the long term.
One of the most important roles of the capital markets is to
spur easier transactions between both the investors and the companies. Both of
the parties should find it easy to find each other and the legal aspects of the
transaction should roll smoothly.
The Primary Market
The most important type of capital markets is the primary
market, which is also referred to as the “new issue market.” It solely deals with the issuance of new
securities that are issued to investors for the first time.
The main role of this type of market is to fund capital for
the companies, governments, institutions, and others. It helps investors invest
their savings and funds in companies that start new projects or enterprises
that are trying to expand their companies.
The companies can raise money in the primary market through
the issuance of securities like shares, debentures, loans and deposits,
preferences, and others.
Methods of Raising funds
Through Prospectus
This is the most used method in the primary market to raise
funds via a public issue. Using this method, the company invites investors and
general members of the public to invest in the company via an advertisement, which
is also called “prospectus.”
After a prospectus is issued, the public subscribes to
shares, debentures, et cetera. According to the response, shares are allotted
to the public. If the subscriptions are very high, the allotment will be accomplished
through a raffle or pro-rata basis.
The company has the choice to sell the shares directly to the
public, though in general companies hire brokers and underwriters. Merchant banks
are another choice to help out with the process, particularly during an initial
public offering.
Private Placment
Public offers are quite expensive. The incidental costs of
IPOs usually are very high. This is the reason
why some companies prefer not to use IPOs. Instead, they offer the investment opportunities to a chosen few
individuals.
The company will then sell its shares to financial
institutes, banks, insurance companies, and some chosen individuals. This will
aid them in raising funds efficiently, quickly, and cost-effectively. These companies
basically do not offer or sell their shares to the public at large.
Rights Issue
In general, when a company is looking to grow or are in need
of additional funds, they first turn to their current investors. So the present
are provided with an opportunity to further invest in the company. They are
given the “right” to buy new shares before the public gets the chance.
This allotment of new shares is accomplished on a pro-rata
basis. If the shareholder opts execute this right and buy the shares, he will
be given the new shares. On the flip side, if the shareholder opts to let go of
this rights issue, then the shares get offered to the public.
The Secondary Market
The secondary market is more commonly referred to as the
stock market or the market exchange. In here, the securities like shares, debts,
bonds, bills, and others are bought and sold by investors.
The main difference between the primary and the secondary market
is that only new securities are issued in the primary market, while the secondary
market is meant for already existing securities. There’s no fresh issue in the
secondary market.
The securities are traded in a highly regulated and
legalized market within strict rules and regulations. This guarantees that
investors can trade without the fear of being cheated.
Conclusion
The capital markets help investors find a way to access investment
opportunities that can offer those profits and possible growth. They play a
huge role in making sure that the growth among companies, governments, and
institutions continue.
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