The label ‘capital market’ is a blanket term for all procedures and institutions providing for transactions of long-term financial products. These products include loans, lease equity, and bonds. Two basic types of capital markets are over-the-counter markets and organized security exchanges. Other types of capital markets, such as primary, secondary, public, and private markets, function within these two basic categories.
Organized security exchanges are tangible markets that occupy a physical space, such as an office or a building, and equity and debt are traded on the premises. All other types of capital markets are over-the-counter. The United States has seven major organized security exchanges, including the New York Stock Exchange and the American Stock exchange, which are the two national markets. The other five markets, such as the Boston or Philadelphia stock exchanges, are regional.
Companies that want to sell securities, but don’t meet the organized exchanges’ listing requirements, often use over-the-counter markets. Business may also uses these types of capital market to avoid fees. A network of stockbrokers, dealers, and brokerage firms completes most over-the-counter transactions.
When a corporation decides to sell equity in the form of stocks in a capital market, the financial managers have a choice to sell privately or publicly. In a public stock market offering, both individuals and investing conglomerates can purchase the company’s securities. Stock sold in public markets is referred to as common stock. Private stock is sold to a limited number of investors in a private placement market.
Private placement capital markets come in two forms, private debt markets and equity markets that sell stocks and other forms of equities. Often, investment firms transfer venture capital to new projects using private equity markets. Stock offered privately is often more expensive than common stock and it pays in higher dividends.
Other types of capital markets include primary and secondary markets. A primary market is created when a company offers its securities for the first time. If the stock is common and the company has never offered stock before, it is called the company’s initial public offering, or IPO. After a company’s IPO, it may continue to offer issue new stock in the primary market.
Secondary markets are those in which previously offered securities are sold and traded. The first buyer of a stock buys in the primary market, but if she decides to sell or trade that stock, she does so in the secondary market. Only initial purchases in primary markets have a direct effect on the stock-issuing company.