Capital Markets

AAA

DEFINITION of 'Capital Markets'

Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. Capital markets are vital to the functioning of an economy, since capital is a critical component for generating economic output. Capital markets include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities. 

VIDEO

Loading the player...

BREAKING DOWN 'Capital Markets'

Capital markets typically involve issuing instruments such as stocks and bonds for the medium-term and long-term. In this respect, capital markets are distinct from money markets, which refer to markets for financial instruments with maturities not exceeding one year.

Capital markets have numerous participants including individual investors, institutional investors such as pension funds and mutual funds, municipalities and governments, companies and organizations and banks and financial institutions. Suppliers of capital generally want the maximum possible return at the lowest possible risk, while users of capital want to raise capital at the lowest possible cost.

The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007-09, which was triggered by the collapse in U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities.

For more information on capital markets, read: Financial Markets: Capital Vs. Money Markets.

RELATED TERMS
  1. Stock Market

    The market in which shares of publicly held companies are issued ...
  2. Money Market

    A segment of the financial market in which financial instruments ...
  3. Auction Market

    A market in which buyers enter competitive bids and sellers enter ...
  4. Secondary Market

    A market where investors purchase securities or assets from other ...
  5. Third Market

    Trading by non exchange-member brokers/dealers and institutional ...
  6. Primary Market

    A market that issues new securities on an exchange. Companies, ...
Related Articles
  1. Economics

    Introduction To Asian Financial Markets

    We look at the history of Asia's financial development and how investors can get involved in these growing markets.
  2. Investing Basics

    A Fresh Look At The Financial Markets

    Different markets provide unique opportunities and risks for investors. Find out more here.
  3. Fundamental Analysis

    Financial Markets: Random, Cyclical Or Both?

    Are the markets random or cyclical? It depends on who you ask. Here, we go over both sides of the argument.
  4. Investing Basics

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks trade.
  5. Investing Basics

    Financial Markets: Capital Vs. Money Markets

    Two commonly used components of the financial market are money markets and capital markets. Find out the similarities and differences between them.
  6. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  7. Trading Strategies

    Using Genetic Algorithms To Forecast Financial Markets

    Genetic algorithms are unique ways to solve complex problems by harnessing the power of nature.
  8. Economics

    An Exploration Of The Development Of Financial Markets

    We take a look at how the market was born and has continued to develop throughout history.
  9. Active Trading

    The Financial Markets: When Fear And Greed Take Over

    If these unpleasant emotions are allowed to influence your decision-making, they may cost you dearly.
  10. Trading Systems & Software

    The Global Electronic Stock Market

    The way trading is conducted is changing rapidly as exchanges turn toward automation.
RELATED FAQS
  1. What are some examples of financial markets and their roles?

    Some examples of financial markets and their roles include the stock market, the bond market and the real estate market. ... Read Full Answer >>
  2. What is the difference between an investment and a retail bank?

    The activities and types of clients for an investment bank versus those for a retail bank highlight the primary difference ... Read Full Answer >>
  3. What is the average range for the price-to-earnings ratio in the electronics sector?

    Investors purchase shares of company stock and other traded securities through capital markets in either primary or secondary ... Read Full Answer >>
  4. What are some of the arguments in favor of debt securitization?

    Debt securitization, or instrument securitization as a whole, received a bad reputation following the financial crisis of ... Read Full Answer >>
  5. What's the difference between a capital market and the stock market?

    Capital market is a broader term that includes the stock market and other venues for trading financial products. The stock ... Read Full Answer >>
  6. Who trades in primary and secondary capital markets?

    Securities are sold on the capital market. Primary and secondary markets for securities trading have different purposes. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  2. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  3. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  4. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  5. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  6. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!