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What is Capital Market?

Stocks and bonds are bought and sold in the capital market.
Pharmaceutical companies may issue shares as a way to raise money for the development of a new drug.
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  • Written By: Geri Terzo
  • Edited By: A. Joseph
  • Last Modified Date: 23 October 2014
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Stocks and bonds are traded in the capital market. There are two types: the equity market, where stocks or equities are bought and sold, and the debt market, where fixed-income trading is done or bonds are bought and sold. The global capital market encompasses trading in all securities — stocks and bonds — across the worldwide financial markets.

There are various activities that occur in the capital markets, all of which are tools for corporations to generate profits either in the near future or over the long term. One way that companies accomplish this is to issue equity shares in either an initial public offering (IPO) or a secondary offering. By issuing shares or selling stocks, a company offers investors a chance to obtain an ownership stake in that corporation while also reaping profits from the sale.

An IPO represents the debut offering in which sales were made available to the public. A follow on offering in the capital marketplace represents an equity offering that unfolds after an IPO. A company might issue shares as a way to raise money for an acquisition or to fund an expansion or project. For example, a pharmaceutical company that is developing a new drug might need to raise capital in order to fund the expensive clinical trials.

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An equity offering can help the company raise funds. A benefit for investors is that, after purchasing shares, they might be entitled to ongoing dividend payments, which are a bonus distribution made by companies as a reward to their shareholders. These payments are made in the form of cash or stock and typically are done on a quarterly basis.

There are also times when tapping the debt capital market makes sense. This market is a place where a company issues bonds or debt to the general public or to an institutional investor, such as an investment bank or hedge fund. Essentially, investors lend a company money by purchasing bonds. In turn, the investor receives ongoing interest payments on that security based on a predetermined interest rate and a final payment on the maturity date, or expiration date, of that bond. When interest rates are especially low in a region, it might make sense for a company to issue debt because it can borrow money more cheaply under that condition.

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Discuss this Article

sunshined
Post 2

I enjoy trading in the capital market and watching the stock market is something I do on a regular basis. I think many people have a different style of investing today than there was many years ago.

My dad would buy stocks and hold on to them for many, many years. I am sure he has sold some stock in his life, but not very often. He owns stock in a lot of blue chip companies that pay good dividends.

The dividend payments he receives are monthly income for him. I have some dividend paying stocks in my portfolio, but I also like to trade some stocks that have a higher risk/reward ratio.

andee
Post 1

Not only can companies benefit from an IPO, but investors can too. I enjoy researching upcoming IPO's to see if it is a company that I would like to invest in.

If you could just know which companies are going to be really successful, you would have a lot of money by now. If someone bought shares of Google or Apple when they first issued shares of stock, and never sold it, they would have doubled their investment many times over.

I don't have any huge success stories when it comes to investing that way. I have purchased several IPO's that did real well and I sold them for a profit. Sometimes I am glad I sold them when I did, and other times I wish I would have held on to them a lot longer than I did.

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