The capital markets are the markets in equity (shares) and long-term debt (bonds); in other words, the markets for long-term capital. In this market, the capital funds comprising both equity and debt are issued and traded.
Capital market can be further divided into primary and secondary markets:
- Primary market is a market where securities are offered to public for subscription for the purpose of raising capital. The primary market is the first-sale market.
- Secondary market is a market where already existing (pre-issued) securities are traded amongst investors.
On the equity side, the primary market includes initial public offerings and rights issues; in the fixed income side, it consists of Treasury auctions (i.e. auctions of Treasury bonds) and original issues of company bonds. The term “placements” refers to transaction on the primary market: the issuer is “placing” its securities with investors.
The secondary market, on the other hand, is what happens after that, It is the resale market, where the securities trade once the securities have been put out among the public.
Secondary market could be either auction or dealer market. Am auction market is one in which investors (usually represented by a broker) trrade directly with each other. A dealer market is one where dealers post bid rates (buy rates) and offer rates (sale rates) at which public investors can trade. While Stock Exchange is the art of an auction market, Over-the-counter (OTC) is a part of the dealer market.
Although corporations do not directly benefit from secondary market transactions, the managers of a corporation closely monitor the price of the corporation’s stock in secondary market. One reason for this concern involves the cost of raising new funds for further business expansion. The price pf a company’s stock in the secondary market influences the amount of funds that can be raised by issuing additional stock in the primary market.
Corporation managers also pay attention to the price of the company’s stock in secondary markets because to affects the financial wealth of the corporation’s owners- the stockholders. If the price of the stock rises, then the stockholders become wealthier. This is likely to make them happy with the company’s management.
Typically, managers own only small amounts of a corporation’s outstanding shares. If the rice of the stock declines, the shareholders become less wealthy and are likely to be unhappy with management. If enough shareholders become unhappy, they may move to replace the corporation’s managers. Most corporate managers also receive options to buy company stock at a selected price, so they are motivated to increase the value of the stock in the secondary market.