How capital markets work

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How capital markets work Powered By Docstoc

The capital market is a financial market for medium and long-term capital, used by firms and the
state to finance investments and other expenditures. Examples include the market for long-term
loans called the bond market and the stock market, the market for equity capital.

It is often regarded as a securities market, and the participants are divided into the capital
market investors, borrowers and intermediaries. The investors, which are also known as capital
providers render capital for investment purposes.

The role of intermediaries, also called the facilitators is to ensure the balance between capital
supply and demand when they conduct transactions in the cash flows of capital demand to
improve information and trade execution.

In most developed countries, capital markets are stronger and more dynamic. The weakness of
these markets in developing countries hinders the formation of savings and is a serious obstacle
to development, forcing them to engage in international capital markets.

The capital market is divided into two main segments, the primary and the secondary market.
The primary market provides information about the issuer and the investment capital market
titles, thus it is particularly important to investors. The secondary market includes the
implementation and management of securities transactions.

The primary market deals with a range of newly released securities sought after by investors.
This market is also called the emissions market, because between these segments, the initial
placement of shares and bonds is undertaken during the emission course. The location of the
primary market is not localized and is thus one of the OTC markets, as various types of
investors in different locations have legal capacity to participate in the market.

The secondary market, also referred to as a circulation market incorporates the trading of
securities between market participants, and the resale of new securities issued by the original
purchaser to new investors. The most popular platforms for the secondary market are the stock

The contracts are carried out individually between the two parties and their obligations are
generally not transferable. And there is financial intermediation, where a commercial bank acts
as the intermediary between the borrower and issuer.

The short term market can be divided into three main segments: interbank money market, public
debt market and the market for corporate debt.

The interbank money market (which also covers the inter-bank bond market) is an important
segment of the money market, built exclusively by banks, including the issuing bank. It is a
market for large volume of daily transactions and high liquidity.

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