How Do Capital Market Works?
Updated: May 27, 2018
The word ‘market’ is identical with a buyer and a seller who have their own necessity to accomplish. In global capital markets, there are buyers and sellers and financial intermediary in between. The capital markets consist of primary and secondary markets.
Primary market creates new securities. Firms sell new stocks and bonds to the public for the first time. In this market, it is where an IPO (Initial Public Offering) takes place. The buying and selling activity is between company and investors. Therefore, securities are purchased directly from an issuing company. The issuers could only sell a security once and the price of a security is fixed.
NYSE (New York Stock Exchange), IDX (Indonesia Stock Exchange), and Nasdaq are commonly known as major exchanges and they are part of a secondary market. Secondary market enables the buying and selling of previously issued securities. Investors trade previously issued securities without the issuing companies’ involvement. Therefore, investors trade among themselves. The securities can be sold in infinite number of times.
Who Buys, Sells, and Why
Buyers and sellers can be individual or institutional investors. They buy securities in order to ‘put cash to work’ by investing and earning a return to generate income on savings. Meanwhile, they sell securities for the purpose of raising cash to be reallocated into different investments and for a company is to broaden ownership and create a market value.
The example of buyers and sellers and their goal of buying and selling securities
Buy : To invest cash and funds to generate a return
Sell : To raise funding for public projects, such as roads and, such as in the case of sovereign wealth funds, to hedge portfolio risk.
· To invest the cash on its balance sheet in order to generate income
· To buy stock of another listed company, as part of a strategic partnership, or in order to acquire another company
· To buy back its own stock in order to raise the price of shares available to the public by reducing supply or to prevent some shareholders from gaining a controlling interest in the company