When you are starting to get into the investment world, you will be exposed to many terms that may seem similar, yet they are different, and that can be quite confusing. Two such terms that you may come across are the capital market and the stock market. It may seem easy to quickly say that these are the same thing but by taking a closer look, you will see that they are not. Let’s compare and contrast these terms and develop a better understanding of them.
The Capital Market
In a basic sense, the capital market is one that is mainly for financial assets. Simplistically, it is a market that brings together the potential suppliers of funds to those who wish/need to consume funds. The buying in the capital market is done by either individuals or institutions. This market provides high-quality information to the investors and provides a myriad of trading options in a variety of mediums. In that sense, It is easy to think of the capital market as a broader financial market than a stock market, or you could think of the stock market as an example of a capital market.
There are two types of capital markets, a primary market and a secondary market. Primary markets are where you will see new issues, or IPOs (initial public offering), of stocks and securities. The primary market is often referred to as the new issues market. A secondary capital market is one in which the trading and exchanging of existing securities take place. Most of the time these existing security trades take place between investors utilizing what is referred to as exchanges.
The capital market functions in multiple ways. One of the main functions is the facilitation of security trading and helping to minimize transaction costs. The capital market can help to deploy an individual or institutions savings to finance long-term investments and can include the trading short, mid, or long-term financial assets.
The capital market is considered one of the key financing options for small companies as well as the largest companies in the world. It can also provide a significant variety of investment options for investors.
The Stock Market
As mentioned earlier, while technically a type of a capital market, the stock market has a much more specific function. The stock market focuses primarily on trading stocks and provide the opportunity to exchange funds for partial ownership of a company. This market is made up of a variety of popular trading exchanges.
Within the US, the the popular stock market exchanges include the New York Stock Exchange and the NASDAQ. The Dow Jones Industrial Average and the S&P 500 are two common indices that trade on the New York Stock Exchange. Each country will have its own popular stock markets. These markets are generally limited in the time frame that they are open for trading, although there can be ways to trade throughout the day in after-hours trading. The stock market provides numerous functions to investors and companies including the registration of securities, monitoring, and redemption of any operations that are completed by shareholders or investors.
The capital markets, including the stock markets, are essential to making funds available to the companies that need them. They are also essential in providing an avenue for individuals and institutions to invest their funds. Whether you are issuing a new security in the primary market or looking to buy the stock of your favorite company in your IRA, the capital markets are the key to making it happen.