Capital Market

The market in which the purchase and sale of stocks and bonds take place. The capital [Page 62]market allocates savings efficiently by bringing together buyers and sellers of financial assets. Companies can raise money from the capital markets by issuing stocks, which are then bought and sold on the stock exchange. Also, governments and corporations can borrow money in the capital markets by issuing bonds. In addition to the capital markets, there is another financial market called the money market. This market primarily refers to banks and other short-term lenders where companies can borrow and invest money on a short-term basis—less than a year—through certificates of deposit and marketable securities. The capital market is also called the securities market. This capital market consists of a primary market and a secondary market. The primary market is where the initial offering of a company's stock is issued for the first time. Companies that want to raise money for the first time will go through the primary market through a syndicate of investment bankers and securities dealers. The investment banks or securities dealers make a market or the stock by raising the money privately and giving the money directly to the company. The syndicate or investment bankers charge a commission for their service. After this process, the company's stock is then listed on the secondary market, which can be the New York Stock Exchange or NASDAQ (National Association of Securities Dealers Automated Quotation). The company's stock is now listed on the stock market at the price determined by the market. The secondary market is where investors can buy and sell the company's stock. The overall stock market performance is linked to the economy and vice versa. When the economy is booming, the stock market will also be rising, and when the economy is in recession, the stock market will be declining. For more information, see Ehrhardt and Brigham (2003), Emery, Finnerty, and Stowe (2004), and Smart, Megginson, and Gitman (2007).