Capital markets are financial markets for the buying and selling of
long-term debt- or equity-backed securities. These markets channel the
wealth of savers to those who can put it to long-term productive use,
such as companies or governments making long-term investments. Financial
regulators, such as the UK's Bank of England (BoE) or the U.S.
Securities and Exchange Commission (SEC), oversee the capital markets in
their jurisdictions to protect investors against fraud, among other
duties.
Modern capital markets are almost invariably hosted on
computer-based electronic trading systems; most can be accessed only by
entities within the financial sector or the treasury departments of
governments and corporations, but some can be accessed directly by the
public. There are many thousands of such systems, most serving only
small parts of the overall capital markets. Entities hosting the systems
include stock exchanges, investment banks, and government departments.
Physically the systems are hosted all over the world, though they tend
to be concentrated in financial centres like London, New York, and Hong
Kong. Capital markets are defined as markets in which money is provided
for periods longer than a year.
A key division within the capital
markets is between the primary markets and secondary markets. In
primary markets, new stock or bond issues are sold to investors, often
via a mechanism known as underwriting. The main entities seeking to
raise long-term funds on the primary capital markets are governments
(which may be municipal, local or national) and business enterprises
(companies). Governments tend to issue only bonds, whereas companies
often issue either equity or bonds. The main entities purchasing the
bonds or stock include pension funds, hedge funds, sovereign wealth
funds, and less commonly wealthy individuals and investment banks
trading on their own behalf. In the secondary markets, existing
securities are sold and bought among investors or traders, usually on an
exchange, over-the-counter, or elsewhere. The existence of secondary
markets increases the willingness of investors in primary markets, as
they know they are likely to be able to swiftly cash out their
investments if the need arises.
A second important division falls
between the stock markets (for equity securities, also known as shares,
where investors acquire ownership of companies) and the bond markets
(where investors become creditors).
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