The capital market is an integral part of the financial market. Unlike money, there is a long-term borrowing of funds. The capital market accumulates and redistributes resources, providing them for a period of more than a year to those who can use them productively. National financial regulators, such as the Bank of England and the US Securities and Exchange Commission, oversee these trading floors to protect investors from fraud.
In practice, the line between the two segments of the global financial market is increasingly blurred, capital flows freely from one to the other, which is especially associated with the emergence of national currencies from the control of national central banks, when strong currencies settle on accounts around the world. In this article we will focus on the features of this trading platform, its main tools, their supply and demand.
Definition and Functioning
For development, ideas and money are needed, both on the scale of one business entity and the state. But very rarely it turns out that both resources are in the hands of the same people. The global capital market is precisely responsible for the accumulation and redistribution of money on a planetary scale. It consists of two segments. World money market needed for short-term placement and borrowing of money. The purchase and sale of currencies makes up a significant part of transactions on it. On the contrary, in the global financial market there is a long-term lending to business entities. In practice, the line between the two segments in modern conditions is increasingly blurred. World market loan capital is dominated by several entities. It:
- Private financial institutions (national and multinational banks, specialized intermediaries).
- State (central and local authorities and other authorized institutions).
- Monetary funds and international banks (IMF, World Bank, Club of London and Paris, regional financial and credit organizations).
Modern features
Nowadays, it is becoming increasingly difficult to imagine your life without the Internet. He firmly entered our lives at work and at home. Use it and trading floors. Modern capital markets are almost always based on computer trading systems. Often, access to them is limited to companies in a particular financial sector and the treasuries of states or corporations. There are thousands of such systems, each of which serves only a small part of the global capital market. Information can be physically located around the world, but usually the servers are concentrated in large financial centers such as London, New York, Hong Kong.
Primary and secondary markets
New shares and bonds are issued by business entities to attract free cash. To do this, they are exposed in the primary capital market, where they are sold to investors, often using underwriting. The main subjects at it are governments (municipal, local, national) and commercial enterprises (companies). The former usually issue only bonds, the latter - not only them, but also shares. The main buyers in the primary market are pension and hedge funds. Sometimes - individuals and large investment banks. In secondary capital markets, existing securities are resold. Here sellers can quickly cash them out.Therefore, the very existence of secondary markets increases the willingness of investors to invest their money in new securities.
Capital market securities
Outstanding financial resources may be presented in the following forms:
- Stocks.
- Bonds.
- Financial derivatives.
- Bank loans
- Mortgages and notes.
Key segments
If you carefully look at the listed financial instruments in circulation, it becomes clear that the capital market is divided into two parts. Shares, bonds and part of derivatives - one of them. This is the so-called stock market. Securities are traded on it. Bank loans, mortgages, and part of derivatives are instruments of the credit market. They are more often safer, but less profitable for the investor. We begin to study the capital market with the main forms of instruments that revolve on it.
Stocks: main categories and their properties
This is the most common type of securities known even to non-specialists, the features of which must be understood when studying the market for loan capital. Shares are issued by business entities to attract additional funds, the purchase gives the right to their owner to receive a certain part of the issuer's profit and sometimes to participate in management decisions. There are two main types of these securities. Ordinary (simple) shares give the right to vote for managerial decisions. One security is 1 vote, excluding cumulative elections to the company's administrative bodies. Holders of ordinary shares receive their dividends from the company's net profit. The board of directors or a similar body of the organization determines what payments will be made per security. This decision is then discussed at a shareholders meeting. It can both increase and decrease these payments.
Preferred stocks are a safer financial instrument than common stocks. Their holders are guaranteed to receive a certain percentage, dividends are paid to them in the first place, as well as investments are repaid in case of liquidation of an economic entity. However often preference shares they do not provide at all or limit the right of their owner to participate in the management of their issuer. This lower (albeit stable) percentage of dividends makes this type of securities safer, but less profitable.
Separately, within the framework of preferred shares, cumulative are allocated. Their main feature is that in case of non-payment of dividends on them, their holders get a voting right for the period until the repayment of the interest due to them. The preferred shares are constituent. They can give the founders of an economic entity additional votes in making managerial decisions, the priority right to purchase new issues and other benefits.
What are bonds?
An offer on the capital market is represented not only by simple and preferred shares. Bonds represent the issuer's obligation to pay their nominal value plus a certain percentage within the agreed time period. They are the equivalent of a loan. Bond income is the sum of the discount on its purchase and coupon. The economic nature of this type of securities is similar to lending, but with a simpler procedure and without the need for a collateral. Bonds are classified by their issuer (state, municipal, corporate), maturity, type of income they bring (discount, with a fixed or floating interest rate), degree of convertibility, currency, purpose of issue, rating and investment attractiveness.
Derivative financial instruments
Derivatives are an agreement under which the parties commit themselves to certain actions with respect to the underlying asset.For example, it may be necessary to sell or buy securities on time and at an agreed price. This financial instrument is used to hedge risks and obtain speculative profit. The underlying asset can be not only stocks and bonds, but also currency, commodities, inflation, interest rates, statistics and derivatives themselves. The development of the capital market is often associated with the emergence of new financial instruments. Derivatives belong to them. However, in fact, they were used in the Ancient World. Equipping caravans, Babylonian merchants entered into a risk sharing agreement, according to which the repayment of loans depended on the success of the delivery of goods. The “default option” was used at that time by many traders.
Bank loan: classification, principles
It is difficult to find a person in our time who does not understand what credit is. A bank loan is one of its types. It represents the amount of money that the borrower receives for the agreed period and at a certain percentage. Bank credit can be active and passive. It all depends on who is the borrower. Bank loans are classified according to a number of characteristics. For example, by maturity and method of repayment, availability of collateral, purpose, purpose of provision, amount of interest, categories of borrowers. Active are considered loan agreements under which the bank acts as a creditor. Borrowing money is based on the principles of urgency, repayment, payment, submission to legislative norms, invariable conditions and mutually beneficial.
Mortgage as a loan tool
This security certifies the right of its owner to execute its borrowers monetary obligations secured by a mortgage. This is a fairly new legal phenomenon, therefore, there is only a small number of legal acts that regulate it.
Money Market and Capital Market
Among financiers, it is customary to divide all loans into short-term (including overnight loans) and long-term. Thus, we can say that the global financial market consists of two parts. However, the difference between them is increasingly blurring. The money market is used to obtain short-term loans. The so-called overnight is a one-day loan, which is also a component of this segment. The global capital market is used for long-term financing. The expected repayment period for such loans is more than one year. In a broad sense, the international capital market represents the channels through which the savings of one group of people become available to industrial and commercial enterprises, as well as to government bodies.
Differences from regular bank lending
There are several features of the capital market. First, unlike ordinary bank loans, the loan here takes the form of a security that can be resold. Secondly, the capital market is not so regulated. Thirdly, investing here is a little more risky. However, bank loans are more affordable for small and medium-sized businesses. Demand in the capital market began to increase sharply only at the end of the last century.
Transaction Examples
When the state needs long-term money, the government often issues bonds. Previously, large investment banks were used to sell them. Now they are most often traded on the capital market. It is this part of the financial market that is responsible for long-term financing. The largest debtor is the US government, several transactions with bonds occur every second. Similarly, an individual company may seek additional financing in the primary or secondary market.One way to invest without buying stocks or bonds is to invest in mutual or exchange funds. In addition, you can trade derivatives. However, you need to understand that they can not only not provide quick profits, but also lead to significant losses.
Regulation
Money management is a measure to limit investment flows between countries. It protects fixed exchange rates. An example of effective capital management is the financial transaction tax proposed by Nobel laureate James Tobin. These measures can be confined to individual sectors of the economy or differentiated depending on the characteristics of capital flows. They include currency restrictions, Tobin tax, determination of the limit on the purchase of foreign assets and the minimum investment period, the introduction of various additional requirements.
