Capital and Natural Resource Markets

5. Capital Market

A capital market is a financial exchange for the buying and selling of long-term debt and equity-backed securities.

Learning Objectives

Define the capital market

Key Takeaways

Key Points
  • In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders.
  • The money markets are used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight. Capital markets are used for the raising of long term finance.
  • Regular bank lending is not usually classed as a capital market transaction, even when loans are extended for a period longer than a year.

Key Terms
  • capital market: The market for long-term securities, including the stock market and the bond market.

A capital market is a financial exchange for the buying and selling of long-term debt and equity-backed securities. The purpose of these markets is to channel the funds of savers to entities that would put that capital to long-term productive use (i.e. borrowers).


NYSE: This is the floor of the New York Stock Exchange. The NYSE is one of the largest capital markets in the world.


Primary vs. Secondary Markets

A key division within the capital markets is between the primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stocks include pension funds, hedge funds, sovereign wealth funds, and, less commonly, individuals and investment banks trading on their own behalf.

In the secondary markets, existing securities are sold and bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises.


Money Market vs. Capital Market

Money markets and capital markets are closely related, but are different types of financial markets. The money markets are used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight. Funds borrowed from the money markets are typically used for general operating expenses, to cover brief periods of illiquidity.

Capital markets are used for the raising of long term finance, such as the purchase of shares, or for loans that are not expected to be fully paid back for at least a year. When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income. It can take many months or years before the investment generates sufficient return to pay back its cost, and hence the finance is long term.


Regular Bank Lending is Not a Capital Market Transaction

Regular bank lending is not usually classed as a capital market transaction, even when loans are extended for a period longer than a year. A key difference is that with a regular bank loan, the lending doesn't take the form of resalable security like a share or bond that can be traded on the markets. A second difference is that lending from banks and similar institutions is more heavily regulated than capital market lending. A third difference is that bank depositors and shareholders tend to be more risk averse than capital market investors.