What is Capital Market?

The Capital Market is a financial mechanism that connects entities that need long-term funds (issuers) with those who have excess funds (investors). In the global economy, the capital market plays a vital role in supporting economic growth by providing access to funding for companies and governments.

The capital market differs from the money market. While the money market focuses on short-term instruments (less than one year), the capital market offers long-term instruments such as stocks, bonds, mutual funds, and derivatives.

General Definition:

The capital market is a medium for raising long-term funds from the public to finance companies and government projects.

Functions of the Capital Market in the Economy

The capital market has an essential role in the financial system of a country. Its primary functions include:

Funding Source
Companies that plan to expand or invest need substantial capital. The capital market provides a solution through issuing stocks (equity) or bonds (debt).
Investment Platform
Investors can place their funds in various instruments like stocks and bonds with the expectation of returns.
Increase Asset Liquidity
The stock exchange allows investment instruments to be traded, giving investors flexibility to liquidate their assets.
Economic Indicator
Capital market movements are often used as an indicator of investor confidence in a country’s economy.
Income Distribution
Through stock ownership, the public can share in the profits of large corporations via dividends.

Types of Instruments in the Capital Market

The capital market offers a wide range of investment instruments, such as:

a. Stocks (Equity)

Stocks represent ownership in a company. Investors who purchase stocks have rights to company profits through dividends and potential capital gains.

b. Bonds

Bonds are long-term debt securities issued by companies or governments, with a promise to pay interest and principal at a specified time.

c. Mutual Funds

A mutual fund pools money from many investors to invest in a diversified portfolio of stocks, bonds, and other securities managed by professionals.

d. Derivatives

Financial instruments whose value is derived from an underlying asset like stocks, bonds, or indices. Examples include options and futures.

e. Exchange Traded Funds (ETFs)

ETFs are investment products that combine the features of mutual funds and stocks, traded on stock exchanges.

Structure of the Capital Market

The capital market consists of two main markets:

Primary Market
Where securities are issued and sold for the first time, such as during an IPO (Initial Public Offering).
Secondary Market
Where previously issued securities are traded among investors through the stock exchange.

The Role of the Capital Market in the Global Economy

The capital market impacts both domestic and global economies, with roles such as:

Attracting Foreign Investment
A well-functioning capital market encourages foreign investors to invest.
Financial Stability Indicator
A declining stock index can signal an economic slowdown.
Alternative Financing Source
Governments issue global bonds to fund development projects.

Factors Affecting the Capital Market

Macroeconomic Conditions (inflation, interest rates, exchange rates)
Government Policies
Political and Security Stability
Technological Advancements (Fintech)
Global Investor Sentiment

Risks of Investing in the Capital Market

Investing in the capital market involves risks, such as:

Market risk
Liquidity risk
Interest rate risk
Inflation risk
Default risk

How to Invest in the Capital Market

Open a Securities Account with a brokerage firm.
Understand Your Risk Profile before choosing instruments.
Diversify Your Portfolio to minimize risks.
Use Fundamental and Technical Analysis before buying stocks.

Capital Market Trends and Innovations in the Digital Era

Online Trading: Investors can trade through mobile apps.
Fintech and Robo-Advisors: Assist investors in decision-making.
Asset Tokenization: Blockchain technology’s potential in capital markets.

Conclusion

The capital market is a crucial part of the global financial ecosystem. For investors, it offers opportunities for profit but also comes with risks that need proper management. Understanding its mechanisms, instruments, and influencing factors enables investors to make well-informed decisions and achieve financial goals.

Deterjem

Capital Market: Definition, Functions, Instruments, and Its Role in the Global Economy