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Capital Markets

In financial economics, capital markets refer to the arena in which people trade financial securities, such as stocks, bonds, and other debt instruments. Capital markets provide a venue for individuals, companies, and governments to raise funds, invest, and manage risk.

Capital markets consist of two main components:

  1. Primary markets: In primary markets, companies and governments issue new securities to raise capital, such as through an initial public offering (IPO) of stocks or a bond issuance. The funds raised in primary markets are used to finance operations, expansion, or other investments.
  2. Secondary markets: In secondary markets, investors trade previously issued securities among themselves, such as through stock exchanges or over-the-counter markets. Secondary markets provide liquidity to investors, allowing them to buy and sell securities quickly and at transparent prices.

Some key functions of capital markets include:

  • Raising capital: Companies and governments can raise funds for investment, expansion, or other purposes by issuing securities in capital markets.
  • Risk management: Investors can use capital markets to manage risk by diversifying their portfolios or hedging against potential losses through derivatives or other financial instruments.
  • Price discovery: Capital markets provide a venue for buyers and sellers to interact, helping to establish fair and transparent prices for securities based on supply and demand.
  • Wealth creation: Capital markets can create wealth for investors by generating returns on their investments and facilitating economic growth through capital formation and innovation.

Capital markets play a crucial role in modern economies, providing a mechanism for allocating capital, managing risk, and supporting economic growth.

Market for medium-longer term loan finance. Capital markets are the markets where securities such as shares and bonds are issued to raise medium to long-term financing. Includes raising of finance by the government through the issue/sale of medium-term and long-term government bonds for example 10 year and 20 year bonds (loans).

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