Capital Markets

12 07 2011

A capital market is the part of a financial market where companies in need of capital (money to invest in some venture) come forward and look for people to invest in them in search of returns. Companies raise money either through bonds or through stocks. Bonds are issued against an interest-bearing loan that the company takes. The loan assures that bondholders will get periodic interest payments. Stocks are considered riskier than bonds. Companies list their stocks on stock exchanges to create a market for them and to allow their shares to be traded subsequently.

If it’s the first time the company is raising money from the public, the process is called an initial public offering (IPO). A market where a public offering is made and companies raise money directly from investors is called a primary market. Once the public offering takes place, investors have the securities, and the company has the money. The company then pay a listing fee to an exchange to make the securities available for subsequent buying and selling through current and potential investors. This enables investors to make profits, cut risks, invest in potential growth areas, and so on by trading in the secondary market.

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