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Money market and capital market are both parts of a financial market.
Capital Market
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as: A market in which money is provided for periods longer than a year. Market that enables suppliers and demanders of long term funds to make transactions.
Classification:
Capital markets may be classified as primary markets and secondary markets.
1. Primary market:
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue.
Initial public offering (is the first sale of stock by a private company to the public. It can be
used by either small or large companies to raise expansion capital and become publicly traded enterprises.) Rights issue (for existing companies); (A rights issue is an issue of additional shares by a company to raise capital)
2. Secondary market:
The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. A market where investors purchase securities or assets from other investors, rather than from the issuing company. Such as the New York Stock Exchange and the NASDAQ are secondary markets. Secondary marketing is vital to an efficient and modern capital market. In the secondary market, securities are sold by and transferred from one investor to another. It is therefore important that the secondary market be highly liquid.
Functions:
Stock exchanges have multiple roles in the economy. This may include the following:
The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.
When people draw their savings and invest in shares it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations.
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets.
Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses.
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.
Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government.