The Capital Market

Introduction

In this project I would like to present and to make you understand what The Capital Market is, what are it’s basic elements and how the processes from this market works, it’s importance to the economy, it’s good sides and it’s bad sides, meaning it’s risks and risk modelling. Investing in bonds and stocks seems to be a quite profitable business, but to survive on the capital market you have to understand all the processes that are happening, the risks that are involved and how to deal with them.

“[Economists] can take facts and figures and bring them together, but their predictions are not worth any more than ours. If they were, they would have all the money and we would not have anything.”

Financial market

In economics, a financial market is a mechanism that allows people to trade money for securities or commodities such as gold or other precious metals. In general, any commodity market might be considered to be a financial market, if the usual purpose of traders is not the immediate consumption of the commodity, but rather as a means of delaying or accelerating consumption over time

Financial markets are affected by forces of supply and demand, and allocate resources over time through a price mechanism such as the interest rate. Typically financial markets use a market making or a bid and ask process.

Both general markets, where many commodities are traded and specialised markets (where only one commodity is traded) exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy that is based, such as a gift economy.

In Finance, Financial markets facilitate: The raising of capital (in the capital markets);The transfer of risk (in the derivatives markets); and International trade (in the currency markets).They are used to match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

Types of financial markets

The financial markets can be divided into different subtypes:

Capital markets which consist of:

*Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof.

*Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities.

Money markets, which provide short term debt financing and investment.

Derivatives markets, which provide instruments for the management of financial risk.

Futures markets, which provide standardised forward contracts for trading products at some future date; see also forward market.

Insurance markets, which facilitate the redistribution of various risks.

Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

To understand financial markets, let us look at what they are used for, i.e. what is their purpose?

Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages.

More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold.