Usachev V.A., Nikulin D.A.
Donetsk National university of economics and trade
named after Mikhailo Tugan-Baranovsky
Capital market
Capital markets provide for the buying and selling of long
term debt or equity backed securities. When they work well, the capital markets
channel the wealth of savers to those who can put it to long term productive
use, such as companies or governments making long term investments.
Capital markets are
almost invariably hosted on computer based Electronic trading systems. Most can
be accessed only by entities within the financial sector or the treasury
departments of governments and corporations, but some can be accessed directly
by the public. Capital markets are defined as markets in which money is
provided for periods longer than a year.
The capital markets is
between the primary markets and secondary markets. In primary markets, new
stock or bond issues are sold to investors, often via a mechanism known as
underwriting. The main entities seeking to raise long term funds on the primary
capital markets are governments and business enterprises. Governments tend to
issue only bonds, whereas companies often issue either equity or bonds. The
main entities purchasing the bonds or stock include pension funds, hedge funds,
sovereign wealth funds, and less commonly wealthy individuals and investment
banks trading on their own behalf. In the secondary markets, existing
securities are sold and bought among investors or traders, usually on a
securities exchange or elsewhere. The
existence of secondary markets increases the willingness of investors in
primary markets, as they know they are likely to be able to swiftly cash out
their investments if the need arises. A second
important division falls between the stock markets and the bond markets (where
investors become creditors).
When a company raises finance from
the primary market, the process is more likely to involve face-to-face meetings
than other capital market transactions. Whether they choose to issue bonds or
shares, companies will typically enlist the services of an investment bank to
mediate between themselves and the market. A team from the investment bank often
meets with the company's senior managers to ensure their plans are sound. The
bank then acts as an underwriter, and will arrange for a network of broker to
sell the bonds or shares to investors. This second stage is usually done mostly
through computerized systems, though brokers will often phone up their favored
clients to advise them of the opportunity. Companies can avoid paying fees to
investment banks by using a direct public offering, though this is not a common
practice as it incurs other legal costs and can take up considerable management
time.
When a government wants to raise
long term finance it will often sell bonds to the capital markets. In the 20th
and early 21st century, many governments would use investment banks to organize
the sale of their bonds. The leading bank would underwrite the bonds, and would
often head up a syndicate of brokers, some of whom might be based in other
investment banks. The syndicate would then sell to various investors. For
developing countries, a Multilateral development bank would sometimes provide
an additional layer of underwriting, resulting in risk being shared between the
investment bank, the multilateral organization, and the end investors. However,
since 1997 it has been increasingly common for governments of the larger
nations to bypass investment banks by making their bonds directly available for
purchase over the Internet. Many governments now sell most of their bonds by
computerized auction. Typically large volumes are put up for sale in one go. A
government may only hold a small number of auctions each year. Some governments
will also sell a continuous stream of bonds through other channels.
Most capital market transactions
take place on the secondary market. On the primary market, each security can be
sold only once, and the process to create batches of new shares or bonds is
often lengthy due to regulatory requirements. On the secondary markets, there
is no limit on the number of times a security can be traded, and the process is
very quick. With the rise of strategies such as high frequency trading, a
single security could in theory be traded thousands of times within a single
hour.Transactions on the secondary market don't directly help raise finance,
but they do make it easier for companies and governments to raise finance on
the primary market, as investors know if they want to get their money back in a
hurry, they will usually be easily able to re-sell their securities. Sometimes
capital market transactions can have a negative effect on the primary borrowers.
For example, if a large proportion of investors try to sell their bonds, this
can push up the yields for future issues from the same entity.
Capital controls are measures
imposed by a state's government aimed at managing capital account transactions.
In other words, capital market transactions where one of the counter-parties
involved is in a foreign country. Whereas domestic regulatory authorities try
to ensure that capital market participants trade fairly with each other, and
sometimes to ensure institutions like banks don't take excessive risks, capital
controls aim to ensure that the macro economic effects of the capital markets
don't have a net negative impact on the nation in question. Most advanced
nations like to use capital controls sparingly if at all, as in theory allowing
markets freedom is a win-win situation for all involved: investors are free to
seek maximum returns, and countries can benefit from investments that will
develop their industry and infrastructure. However sometimes capital market
transactions can have a net negative effect. For example, in a financial
crisis, there can be a mass withdrawal of capital, leaving a nation without
sufficient foreign currency to pay for needed imports. On the other hand, if
too much capital is flowing into a country, it can push up inflation and the
value of the nation's currency, making its exports uncompetitive. Some nations
such as India have also used capital controls to ensure that their citizen's
money is invested at home, rather than abroad.
Literature:
1. Finance : Textbook ed. V. Kovalev, publ Avenue, 2004
2. Finance and credit : Textbook ed. prof. M. Romanovsky, publ Higher
Education, 2006