Capital markets are financial markets in which market participants buy, sell and trade a wide range of different securities such as, for instance, equity, and debt securities, commodities, currencies as well as derivatives based on these securities. Any market flourishes by pooling buyers and sellers, resulting in increased liquidity and more efficient pricing.
Market participants include institutional investors (such as insurance companies, pension funds etc.), asset managers, hedge funds and retail investors (i.e. consumers who allocate their savings to investing in listed securities). Whereas in the past intermediates such as brokers, market makers and banks provided liquidity and smoothened trading, nowadays most trading is done by automated systems. An increasing part of the volumes is a result of increased program trading (via algorithms) and flash trading.
Primary and secondary markets
When companies or governments are raising funds through the issuance of equity or debt capital market securities, one talks about the primary market. On the primary market (where initial public offerings are done), each security can be sold only once. The process to create new shares or bonds is often lengthy due to legal and regulatory requirements.
In contrast, the secondary market is referred to as the financial market where the various market participants can buy, sell and trade securities.
Although the traditional stock markets such as Euronext Amsterdam, the New York Stock Exchange (NYSE), Nasdaq OMX and the London Stock Exchange (LSE) are still important trading platforms, an increasing number of trades is executed on competing platforms such as Bats Chi-X and Turquoise and dark pools. Over the counter (‘OTC’) markets mean that two parties deal outside a regulated market.
Capital markets are monitored to, among others, create a level playing field and to protect investors against fraud. In the Netherlands the financial regulator is the Netherlands Authority for the Financial Markets (AFM or Autoriteit Financiële Markten). Its US counterpart, the SEC (Securities Exchange Commission) is another well-known regulator.