Internationa Capital
What are Capital Markets?
Capital markets are markets where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income). Stock and bond markets are two major capital markets. Capital markets promote economic efficiency by channeling money from those who do not have an immediate productive use for it to those who do.
1. Capital Markets Efficiently Direct Capital to Productive Uses
Capital markets carry out the desirable economic function of directing capital to productive uses. The savers (governments, businesses, and people who save some portion of their income) invest their money in capital markets like stocks and bonds. The borrowers (governments, businesses, and people who spend more than their income) borrow the savers ' investments that have been entrusted to the capital markets.
When savers make investments, they convert cash or savings (risk-free assets) into risky assets with the hopes of receiving enhanced benefits in the future. Since all investments are risky, the only reason a saver would put cash at risk is if returns on the investment are greater than returns on holding risk-free assets. Buying stocks and bonds and investing in real estate are common examples. The savers hope that the stock, bond, or real estate will "appreciate," or grow in value.
2. Finance can be Direct or Indirect
The example we just used illustrates a form of "direct" finance. In other words, the companies borrowed directly by issuing securities to investors in the capital markets. By contrast, indirect finance involves a financial intermediary between the borrower and the saver. For example, if Carlos and Anna put their money in a savings account at a bank, and then the bank lends the money to a company (or another person), the bank is an intermediary. Financial intermediaries are very important in
Capital markets are markets where people, companies, and governments with more funds than they need (because they save some of their income) transfer those funds to people, companies, or governments who have a shortage of funds (because they spend more than their income). Stock and bond markets are two major capital markets. Capital markets promote economic efficiency by channeling money from those who do not have an immediate productive use for it to those who do.
1. Capital Markets Efficiently Direct Capital to Productive Uses
Capital markets carry out the desirable economic function of directing capital to productive uses. The savers (governments, businesses, and people who save some portion of their income) invest their money in capital markets like stocks and bonds. The borrowers (governments, businesses, and people who spend more than their income) borrow the savers ' investments that have been entrusted to the capital markets.
When savers make investments, they convert cash or savings (risk-free assets) into risky assets with the hopes of receiving enhanced benefits in the future. Since all investments are risky, the only reason a saver would put cash at risk is if returns on the investment are greater than returns on holding risk-free assets. Buying stocks and bonds and investing in real estate are common examples. The savers hope that the stock, bond, or real estate will "appreciate," or grow in value.
2. Finance can be Direct or Indirect
The example we just used illustrates a form of "direct" finance. In other words, the companies borrowed directly by issuing securities to investors in the capital markets. By contrast, indirect finance involves a financial intermediary between the borrower and the saver. For example, if Carlos and Anna put their money in a savings account at a bank, and then the bank lends the money to a company (or another person), the bank is an intermediary. Financial intermediaries are very important in
Bibliography: www.wikipedia.com www.Imf.org www.economictimes.com www.google.com