Capital market, also known as the securities market is a trading market that gathers capital from the investors and makes them available to the companies and the government for the development of projects. The capital market includes the bond market and the stock market. The capital market consists of development banks, commercial banks and stock exchanges.
Who are the Key Players in the Capital Markets?
The capital market refers to institutions through which long term funds like debts and equities are issued and sold. The capital market consists of two types of market: primary and secondary.
Primary market: The primary market or the new issues market deals with securities being issued for the first time. The functions of the primary market is to facilitate the transfer of investible fund savers to entrepreneurs seeking to establish a new enterprise or to expand existing ones through the issue of securities for the first time. The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals.
Secondary market: The secondary market is also known as the stock market or share market. It is a market for the purchase and sale of existing securities. It helps existing investors to sell their securities and fresh investors to enter the market. It also provides liquidity and marketability to existing securities.
Primary vs. Secondary Markets:
Listed below are some of the differences between the primary and the secondary markets:
- A primary market is a part of the capital market where the new securities, shares and bonds are issued to be sold for the first time whereas the secondary market is a place where the securities purchased in the primary market are traded among investors.
- In the primary market,the companies issue their shares through the process of Initial Public Offering (IPO) and Further Public Offering (FPO). But in the secondary market, no shares or bonds are issued. It is a market where the existing securities are offered for trading.
- In the primary market the trading takes place directly between the investors and the company. But in the secondary market the trading takes place between investors through an intermediary known as a stockbroker. A broker facilitates the negotiations of securities between two investors and helps them reach an agreement.
- TheIPO is the process of launching shares for the very first time in the primary market with the purpose of raising money from potential investors. FPO is the process in which the already listed companies offer fresh equities to the market for raising additional funds. Once the fresh equities are sold, they cannot be resold by the companies. However the securities can be presented in the secondary market and can be traded. What is to be noted is that the securities in the secondary market can be sold innumerable times.
- The primary market consists of four key players. They are the corporations, institutions, investment banks and public accounting firms. The key players in the secondary market are buyers and sellers and the investment banks.
SEE ALSO: International Capital Markets
Four Key Players in the Primary Market:
Outlined below are the four key players of the primary market:
- Corporations: a corporation is a legal entity that is separate and distinct from its owners. It is usually a group of people or entities authorized to act as a single entity. Corporations enjoy most of the rights and responsibilities that individuals possess: enter contracts, offer loan and borrow money, hire employees, own assets and pay taxes. In the capital market, corporations are the organisations that act independently and require investments and funds to manage and grow the business. The composition of the corporations varies with respect to size, industry and geographical locations. A career at corporations that relates to the markets includes corporate development, investor relation and financial planning and analysis. Examples of publically traded corporations include: Alphabet, Amazon, Apple, Exxon and Toyota.
- Institution:institution in capital market consists of the fund managers, institutional investors and retail investors. The investors provide funds needed by the corporations for the growth of businesses. The fund is raised by these corporations by issuing debt or equity to these investors in the form of bond and shares. The exchange of capital and debt or equity completes the cycle of the two main players of the capital market.Examples of top firms are: Blackstone, KKR, The Carlyle Group, and ApolloGlobal Management.
- Investment bankers:the role of the investment banks is to guide their clients in making the right decisions and finalising right deals so that they face minimum loss. Investment banks in India also advise their clients to buy back their shares from the market at the right time and offer advisory services to big companies and corporate bodies. The investment bank works as an intermediary between corporations and institutions. The job of the investment banks is to connect the institutions with the corporate and assisting clients with mergers and acquisitions (M&A s) and advising them on unique investment opportunities such as derivatives. Examples of top investment banks are: Goldman Sachs, JP Morgan, Credit Suisse, HSBC, Morgan Stanley
- Public accounting firms:public accounting refers to business that provides accounting services to other firms. Public accountants provide accounting expertise, auditing and tax services to their clients. This can include the handling of many accounting functions on an outsourced basis. Depending on their divisions, public accounting firms can engage in multiple roles in the primary market. The roles include financial reporting, auditing financial statements, taxation, consulting on accounting systems, M&A advisory and raising capital. Therefore public accounting firms are usually hired by corporations for their accounting and advisory services. Examples of best public accounting firms include: Deloitte, PwC, Ernst & Young, and KPMG.
SEE ALSO: Indian Capital Markets
Key Players in the Secondary Market:
In the primary market, the companies initially issue the debt or equity instruments mainly to raise funds for business and funding new projects. Whereas, the secondary market enables the investors to sell and trade in the existing securities with other investors. The trading is facilitated by brokers, who enable both parties to reach a mutual agreement. The secondary market allows the trading of the issued bonds and shares between investors and enables them to enter or exit securities easily, making the market liquid.
- Buyers and sellers:the buyers and sellers transact on an exchange in the secondary market.In the secondary market, fund managers or any investors who wish to purchase securities or debts will have to locate a seller. Transactions are facilitated through a central marketplace, including a stock exchange or Over the Counter (OTC).
- Investment banks: the investment banks are specialized in the field of debt and equity research and they work closely with traders and security sales personnel to determine the approximate prices of securities in the current market situation. They expedite the sales and trading of issued debts and equities between buyers and sellers in the secondary market. The investment banks provide services like equity search and potential risk analysis to help their clients take well-informed decisions. Moreover,investment banks sell and trade securities on behalf of the clients to maximize their profits.
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Capital Markets Recap:
The above article helps us to understand the concept of capital market and the key players involved in it. The capital market is divided into two separate types of markets. They are: primary market and secondary market. In the primary market the institutions invest their surplus capital in corporations to earn some returns and the latter issues debt or equity instruments to raise money from the investors for growing and operating business and for funding new business projects. Investment banks acts as advisors for institutions and corporations on mergers and acquisitions (M&A) and initial public offerings (IPO). Public accounting firms provide accounting and advisory services to the institutions and corporations.
The secondary market refers to a market where the investors can meet other investors and trade in the bonds and equities issued by the corporations. The secondary market is a platform where the existing securities are traded and the investors have the option to enter or exit securities easily. Investment banks offer their sales, trading and research services to help buyers and sellers make decisions on their securities.