August 4, 2023 (NO COMMENTS)

The capital market encompasses a segment of the financial system dedicated to raising capital through bonds, shares, and various investments. In the primary capital market, new stocks and bonds are created and offered to investors, while the secondary capital market facilitates the trading of securities among investors. Capital markets are an integral part of the global financial system, serving as a platform where individuals, institutions, and governments buy and sell various financial instruments to raise capital and invest. These markets facilitate the flow of funds between those who have surplus capital (investors) and those who need capital to finance their projects or operations (issuers).  

 

The Primary Capital Market 

When a company offers its new stocks and bonds to the public for the first time, it enters the primary capital market, also known as the new issues market. Often, this new issuance is in the form of an Initial Public Offering (IPO). During this process, investors buy the securities from the company, and to facilitate the offering, the company engages an underwriting firm. The underwriting firm thoroughly evaluates the offering and prepares a prospectus that outlines the pricing and other essential details of the securities being offered. 

Firms that release securities via the Primary Capital Markets often engage investment bankers to secure commitments from significant institutional investors for the initial purchase of these securities. 

 

Expertise On Secondary Capital Markets 

The secondary market, often referred to as the stock market, is where securities are traded after the company has already sold its offering on the primary market. This market provides an opportunity for small investors to trade securities, as they are excluded from participating in the initial public offerings (IPOs). Anyone can buy securities on the secondary market as long as they are willing to pay the current asking price per share.

In the secondary market, a broker typically acts as an intermediary, purchasing the securities on behalf of an investor. Unlike the primary market, where prices are fixed before the IPO, prices in the secondary market fluctuate based on demand and supply. Investors are also required to pay a commission to the broker for facilitating the trade.

Once the initial offering is complete, the issuing company no longer plays a direct role in the transactions between investors, except in cases of a company stock buyback.

Two Categories Of Secondary Market

• Auction Markets 

In the Capital Markets auction markets, participants, including individuals and institutions, gather in a centralized location to declare the prices at which they want to buy and sell securities. These prices are known as bid and ask prices. The main objective is to foster an efficient market by facilitating open communication and price disclosure among all parties involved.

The underlying principle is that, in such a setting, there is no need to actively search for the best price of a good, as the coming together of buyers and sellers naturally leads to the emergence of mutually acceptable prices.

• Dealer Markets 

On the other hand, a dealer market operates differently, eliminating the need for physical convergence at a central location. Instead, Capital Markets participants connect through electronic networks. In this setup, dealers maintain a stock of securities and stand ready to trade with other market participants by buying or selling as needed. These dealers make profits based on the difference between the buying and selling prices of the securities.

An illustrative instance of a dealer market is the Nasdaq, where the dealers, referred to as market makers, offer fixed bids and ask prices at which they are willing to purchase or sell a security. The underlying concept is that competition among dealers fosters the most favorable price options for investors. 

What are the avenues used by firms to raise capital? 

Firms seeking to raise equity capital have options such as private placements from angel or venture capital investors from the Capital Markets, but the most significant amount can be obtained through an initial public offering (IPO), where shares are listed on the stock market for the first time. On the other hand, debt capital can be acquired through bank loans or by issuing securities in the bond market. 

Concluding with 

While not all activities in the discussed markets directly impact individual investors, it is crucial to grasp the market’s structure. The process of bringing securities to the market and trading them on various exchanges is at the heart of the market’s functioning. Consider a scenario where organized secondary markets don’t exist one would need to personally locate other investors to buy or sell a stock, which would be quite challenging. 

In reality, numerous investment scams are centered around Capital Markets securities lacking a secondary market. To aware clients Ascenteum offers commendable Capital Markets Consulting services. Our goal is to assist you in finding the product or service that best aligns with your specific requirements, which is why we offer extensive Capital Markets consulting to ensure you can make well-informed decisions.

Our expertise extends to performing health checks on your current environment to expedite processes, valuations, and reporting, or concentrating on providing additional solutions for various modules or asset classes. Rest assured that our team of consultants boasts considerable experience in handling current regulations, the latest releases in the capital market consulting field, as well as legacy systems during migration processes.