Capital Markets and Stock Exchanges

CAPITAL MARKETS & STOCK EXCHANGES

Introduction to capital markets in the world (USA) and Romania

The market where investment funds like bonds, equities and mortgages are traded is known as the capital market . The financial instruments that have short or medium term maturity periods are dealt in the money market whereas the financial instruments that have long maturity periods are dealt in the capital market.

Role of the Capital Market

The main function of the capital market is to channelize investments from the investors who have surplus funds to the investors who have deficit funds. The different types of financial instruments that are traded in the capital markets are equity instruments, credit market instruments, insurance instruments, foreign exchange instruments, hybrid instruments and derivative instruments.

The money market instruments that are traded in the capital market are Treasury Bills, federal agency securities, federal funds, negotiable certificates of deposits, commercial paper, bankers' acceptance, repurchase agreements, Eurocurrency deposits, Eurocurrency loans, futures and options.

Capital Market can be divided into Bond Market and Stock Market. In Bond Market, buying and selling of newly issued and existing bonds takes place. In Stock Market, exchange of newly issued and existing shares or stocks is carried out.

The participants of capital market are mainly those who have a surplus of funds and those who have a deficit of funds. The persons having surplus money want to invest in capital market in hope of getting high returns on their investment. On the other hand, people with fund deficit try to get financing from the capital market by selling stocks and bonds. These two kinds of activities keep the capital market going.

Capital Market is characterized as the provider of long-term financing. The instruments used for this long-term financing are equity instruments, insurance instruments, derivative instruments and especially bonds.

Primary Market and Secondary Market

Another way to classify financial markets that that mentioned earlier in this section is by distinguishing the time in which the bonds are issued. In this case, markets are divided into primary and secondary markets.

The primary market, also called issuing market, appears when entities allowed to quote in this market issued stocks or debentures that are bought by investors. In this primary market companies demanding funds meet the fund suppliers or investors. In this market we could distinguish two markets very well differed from one another: that of stocks issuance and that of debentures issuance.

The mechanism used to quote on the market needs the following steps:

• be allowed to quote

• make a public offer to sell stocks

• allocate or sell stocks. In this phase it is very important to fix a stock price that is attractive. In case there is an excess in the demand of stocks we must proceed to share to ensure the maximum fragmentation of stockholders.

Once stocks are allocated, quoting in the market starts. This way investors that have bought stocks can now sell them when they deem convenient.

Stocks meant to be sold can be old stocks (stocks previously issued) or new stocks (stocks to be issued):

Old stocks: one chooses old stocks when the company has its own portfolio. That is, when it has their own stocks, or when stockholders wish to partially withdraw their investment in stocks. This last case occurs when founder stockholders wish to profit the whole or part of their initial investment.