What are Capital Markets

"Capital Markets" refers to activities that gather funds from some entities and make them available to other entities needing funds. The core function of such a market is to improve the efficiency of transactions so that each individual entity doesn't need to do search and analysis, create legal agreements, and complete funds transfer.

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Capital Markets

BREAKING DOWN Capital Markets

Capital markets consist of suppliers and users of funds. Suppliers of funds include households and institutions serving them, such as pension funds; life insurance companies; charitable foundations such as colleges, hospitals, and religious institutions; and nonfinancial companies generating cash beyond their needs for investment. Users of funds include home and motor vehicle purchasers; nonfinancial companies; and governments financing infrastructure investment and operating expenses. 

Markets include primary markets, where new equity stock and bond issues are sold to investors, and secondary markets, which trade existing securities.

Capital Markets in Context

Broadly, capital markets can refer to markets for any financial asset. (See also, Financial Markets: Capital Versus Money Markets.)

In the context of corporate finance, the term refers to venues for obtaining investable capital for nonfinancial companies. Here, "investable capital" includes the external funds included in a weighted average cost of capital calculation – common and preferred equity, public bonds, and private debt – that are also used in a return on invested capital calculation.

In a more limited corporate finance context, it refers to only equity funding, excluding debt.

In a financial services industry context, it refers to financial companies involved primarily in private markets, as opposed to public ones. In this sense, it is referring to investment banks, private equity, and venture capital firms in contrast to broker-dealers and public exchanges. In this case, capital markets are considered primary offerings of debt and equity (initial public offering) supported by investment banks through underwriting. This contrasts with the time after the initial public offering when the offering is publicly trading on exchanges in a secondary market. In the U.S., the primary regulator for an exchange is the Securities and Exchange Commission (SEC). This industry context is often meant when "capital markets" are contrasted with "financial markets."

In the context of public markets operated by a regulated exchange, "capital markets" can refer to equity markets in contrast to debt/bond/fixed income, money, derivatives, and commodities markets. Mirroring the corporate finance context, "capital markets" can also mean equity and debt/bond/fixed income markets. (See also, Introduction to Capital Markets History.)

In a tax context, capital markets might refer to investments intended to be held for over one year for capital gains tax treatment. This is often related to transactions arranged privately through investment banks or private funds (such as private equity or venture capital).