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What is the capital market?
Different institutions and procedures that conduct transactions having maturity period greater than one year are known as the capital market. They can also be referred as the organized security exchanges and the over-the-counter market. The capital markets are formed when the buying and selling of the stock such as brokerage commissions can be done by the investors without paying any transaction cost, accurate and updated information is present regarding the firm, when no corporate or personal taxes has to be paid, the stocks can be issued by the companies without incurring any cost, the management and stockholders does not have any conflicts of interest and there is no existence of financial distress and bankruptcy costs. According to Investopedia.com (2009) the capital market is a market where financial securities are traded by institutions and individuals and it is comprising of both the primary and secondary markets. These financial securities may be sold or traded in order to get funds. Term loans and financial leases, corporate equities, and bonds are different types of financial securities. For this purpose, the organizations the transactions are made in the public and private sectors.
How is the primary market different from the secondary market?
The new securities are issued and traded in the primary market but when the public starts trading this stock then this type of market is known as secondary market. In primary market the money against the stock is received by the issuing firms in actual whereas in secondary market the money against the selling of the stock goes to the previous owner and not the issuing firm. Therefore, the only time when the issuing companies receive money against their stocks is in the primary market and the secondary market is involved in trading of the securities that have previously been issued and bought.
In your opinion, are these markets efficient? Why or why not?
These markets are working efficiently in the U.S. where the funding for the business or new capital is raised by the help of capital markets. Actually, it is easier for the companies to float successfully their new security offerings in a continuous secondary market. This is because here the prices are determined competitively.
Investopedia. (2009). Capital Markets. Retrieved October 13, 2009, from http://www.investopedia.com/terms/c/capitalmarkets.asp
Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2005). Financial Management: Principles and Applications (10th ed.). Upper Saddle River, NJ: Pearson Education, Inc.
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