The international financial system is made up of many sub-markets. Each of which fulfils a different function. One of these sub-markets is the capital market.
What is the capital market?
The capital market is part of the financial market, more precisely the market for medium and long-term capital procurement. Investments in the capital market, therefore, have a term of at least one year.
Mainly shares, bonds and participation certificates are traded on the capital market (https://www.youreviewit.com/credit-cards/getmyoffer-capitalone-com-enter-reservation-number-to-apply/). There, supply and demand are brought together. Investors make financial capital available through their financial investments. The borrowers in turn ensure the corresponding demand, for example by issuing shares. Companies raise money for their investments in the capital market. Investors can benefit from the returns that the securities generate.
There is an organized and a non-organized capital market. While the former takes place on the stock exchange and is subject to supervision, the unorganized capital market takes place over the counter. It is therefore also called the grey capital market.
What are the functions of the capital market?
Equalization: The ideal capital market equalizes supply and demand for the products, i.e. strives for a maximum match between supply and demand for securities. This market equalization is established by so-called intermediaries who mediate between the two sides. Trustees, patent law firms or auditing offices can act as intermediaries, for example. In a capital market transaction, the two parties never come into personal contact.
Generating returns: However, the capital market is not just about arranging and coordinating investment and financing plans. In addition, the capital market has an allocation function. This means that the capital employed is ideally allocated to the investment with the highest return.
Functional protection: In addition, it must be ensured that both the investors and the borrowers are provided with sufficient information to be able to make a decision for or against an investment.
Lot Size Transformation: This feature allows the bank to bundle many small investment amounts together to make large investments possible.
Risk transformation: Risk transformation allows capital to be spread across many companies. The aim is to minimize the risk for investors.
Term transformation: Due to the term transformation, a company can be provided with short-term invested capital for a longer period of time.