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Capital markets are a broad category of markets facilitating the buying and selling of financial
instruments. In particular, there are two categories of financial instruments that capital in which markets
are involved. These are equity securities, which are often known as stocks, and debt securities, which are
often known as bonds. Capital markets involve the issuing of stocks and bonds for medium-term
and long-term durations, generally terms of one year or more.
Capital markets are overseen by the Securities and Exchange Commission in the United States or other
financial regulators elsewhere. Though capital markets are generally concentrated in financial centers
around the world, most of the trades occurring within capital markets take place through computerized
electronic trading systems. Some of these are accessible by the public and others are more tightly
regulated.
Other than the distinction between equity and debt, capital markets are also generally divided into two
categories of markets, the first of which being primary markets. In primary markets, stocks and bonds are
issued directly from companies to investors, businesses and other institutions, often through underwriting.
Primary markets allow companies to raise capital without or before holding an initial public offering so as
to make as much direct profit as possible. After this point in a companys development, it may choose to
hold an initial public offering so as to generate more liquid capital. In such an event, the company will
generally sell its shares to a few investment banks or other firms.
Because of the significant differences between these two kinds of markets, they are often used in different
ways. Due to the longer durations of their investments, capital markets are often used to buy assets that
the buying firm or investor hopes will appreciate in value over time so as to generate capital gains, and
are used to sell those assets once the firm or investor thinks the time is right. Firms will often use them in
order to raise long-term capital.
Money markets, on the other hand, are often used to general smaller amounts of capital or are simply
used by firms as a temporary repository for funds. Through regularly engaging with money markets,
companies and governments are able to maintain their desired level of liquidity on a regular basis.
Moreover, because of their short-term nature, money markets are often considered to be safer
investments than those made on the equities market. Due to the fact that longer terms are generally
associated with investing in capital markets, there is more time during which the security in question may
see improved or worsened performance. As such, equity and debt securities are generally considered to
be riskier investments than those made on the money market.
Q.3
Taking into account the role in the market economy, the capital market
occupies an important place, through their specific mechanisms, succeeding to
give its contribution to the economic development of the society. In
consequence, the public authorities must notice the importance of the capital
market in the national economy and, on the other hand, to make the efforts for
insuring the necessary framework for the normal functioning of its specific
mechanisms. The valences of the capital could be even more interesting in the
case of emerging markets being well-known its contribution in reorienting
financial resources to efficient activities, contributing to the economic reform,
but also being interesting in the privatization process.
Again the capital market was instrumental to the initial twenty five Banks that
were able to meet the minimum capital requirement of N25 billion during the
banking sector consolidation in 2005. The stock market has helped
government and corporate entities to raise long term capital for financing new
projects, and expanding and modernizing industrial/commercial concerns
(Nwankwo, 1991).
Introduction
The contact between agents with deficit of money and the ones with monetary
surplus can take place in a direct way (direct financing), but also by the means
of any financial intermediation form (indirect financing), situation in which
specific operators realize the connection between the real economy and the
financial market. In this case, the financial intermediaries could be banks,
investment funds, pension funds, insurance companies or other non-bank
financial institutions.
Even if, traditionally, the companies appeared only as agents with deficit of
money, in the last two or three decades it could be noticed a change in the
financial behavior of the modern firms: these are not considering anymore the
financial market (both the capital and the monetary market) only as sources
for rising funds (as issuers of financial assets), but appears more often as
buyers of financial assets. The capital market fulfills the transfer function of
current purchasing power, in monetary form, from companies which have a
surplus of funds to those which have a deficit, in exchange for reimbursing a
greater purchasing power in the future; in this way the capital market makes
possible to separate the saving act from the investment one. Capital market
has played major roles during the privatization of public owned enterprises,
recent recapitalization of the banking sector and avenue of long term funds to
various government agencies and companies in Nigeria.
Covering the risk, that could be realized by the help of different operations,
market orders or derivatives, defines the function of insurance against risks,
specific function of the capital markets. The capital market allows risk
dispersion between investors (of the diversifiable risk), exactly in the same
measure in which each of them is willing to assume it, too.
From the issuers point of view, the money which is necessary for the
development or the unfolding of their activity can be mobilized by the help of
the capital market at accessible costs, theoretically speaking smaller than
those possibly obtained by the help of the banks or by other financial
intermediaries.
The role of capital markets is vital for inclusive growth in terms of wealth
distribution and making capital safer for investors. Capital markets can create
greater financial inclusion by introducing new products and services tailored
to suit investors preference for risk and return as well as borrowers project
needs and risk appetite. Innovation, credit counseling, financial education and
proper segment identification constitute the possible strategies to achieve this.
Q4
A new issue is a reference to a security that has been registered and issued and is being sold on a
market to the public for the first time. The term does not necessarily refer to newly issued stocks,
although initial public offerings (IPOs) are the most commonly known new issues. Securities that can be
newly issued include both debt and equity.