Capital markets refer to the platform where businesses and governments can raise funds by issuing and trading financial assets. There are two primary types of capital markets – debt market and equity market – that help businesses raise capital for their growth and development. In this article, we discuss the different types of capital markets.
Equity market
The equity market, also known as the stock market, is the platform where businesses issue shares to investors in exchange for their investment. When investors purchase shares of a business, they become partial owners of the company, allowing them to participate in the company's profits and decision-making. The stock market is ideal for businesses that want to raise a significant amount of capital and increase public awareness of their operations.
Debt market
The debt market is where businesses issue bonds, debentures, or other forms of long-term debt securities to investors. Investors lend money to the business, which is repaid with interest at a predetermined future date. The bond market is ideal for businesses that want to raise funds for specific long-term projects, as the securities have a longer maturity date than other capital market instruments.
Foreign exchange market
The foreign exchange market, also known as forex, is the platform for buying and selling currencies. The forex market is essential for businesses that operate internationally and want to hedge their foreign currency risks. It is also essential for businesses that participate in international trade, as the forex market provides a platform to convert foreign currency into the domestic currency.
Commodity market
The commodity market is the platform where businesses can buy and sell commodities such as gold, silver, oil and agricultural products. The commodity market is ideal for businesses that want to trade and hedging strategies for their raw material inputs, such as agricultural companies and oil and gas companies.
Capital markets offer businesses a platform to raise funds through equity or debt financing. However, business loans offer a better option for small and medium-sized businesses. Business loans are more accessible, easier to obtain and have flexible repayment options. They allow business owners to retain ownership and control over their business and they come with lower costs. Business owners should weigh their options and choose the right financing option that suits their unique needs.
Additional read: What are debt instruments
Additional Read: What is Bridge Financing
