A capital market is a financial structure that provides the mechanism for the transfer of personal savings funds to organizations for the purposes of investment. In most instances, these organizations are for-profit business firms; however, government and other organizations also seek funds through capital markets.
Common stocks, bonds, and other financial instruments all are associated with capital markets. Long-term capital is provided to business organizations through the operations of capital markets. It is important and interesting to note that most people associate the capital markets with the trading of common stocks (and, indeed, most of the annual trading activity in the capital markets involve the trading of common stocks); however, most of the new long-term capital provided to business organizations through capital market operations each year results from bond activity. Corporations benefit directly (within the context of capital infusion) from common stock transactions only through new issues.
The equity market segment of a capital market is concerned with the trading of stocks in corporations or limited liability companies. Stocks represent a share in the ownership of a corporation. The bond segment of a capital market is concerned with the placement or trading of corporate debt instruments. Bonds represent a claim against the assets of the issuing corporation.
Prices for stocks, bonds, and other financial instruments traded in capital markets are established by the risk and return characteristics associated with each separate stock, bond, or other financial instrument. More correctly, prices in a capital market are a function of the perceptions of investors of the risk and return characteristics associated with each separate stock, bond, or other financial instrument.
Return refers to the actual or anticipated gain that an investor will receive on an investment. Risk refers to the safety of the pr...