Capital market is seen as an avenue for long term financial securities. Instruments such as bonds, equity, derivatives, commodities, and currencies are sold on such markets. With varying intermediaries, economic agents, regulators, and instruments used the market as a way of affecting a country's economy.
1. What's capital market
It is the market for the buying and selling of long term securities such as bonds and equity. Capital market brings together economic agents referred to as investors, businesses, and government together. Investors (surplus agents) bring the funds while businesses and governments (deficit agents) want those funds.Â
To achieve the goals of economic agents, there are market middlemen. The institution ensures that both economic agents can strike a deal based on the demand and supply curve and business valuation. Popular intermediations are insurance companies, stockbrokers, Bureau de change, and commercial banks.
In Nigeria, the Security and Exchange Commission (SEC) is the main regulator of this market. The CBN also contributes as a regulator in some ways especially in areas of currencies in order to control the money supplied. Recently, we have seen the CBN taking giant strides to control the fall in Naira compared to foreign currencies.
The primary instruments used in the market are equity and bonds. Others are currencies, commodities, derivatives, real estate, and mutual funds (although mutual funds are categorized in the money market by some authors). For economic agents, the venue available for the trading of these securities is mainly the Nigerian Exchange Group (NGX). This is for equity and bonds. There is a market for currencies referred to as Bureau De Change (BDC). Commodities have the Nigeria commodity exchange.Â
2. Types of Capital Market
The capital market is made up of primary and secondary markets. While the primary market is known for the buying and selling of new securities, the secondary type is for existing market instruments. That's to say, after a new security has been sold. Investors with them can decide to sell them. If they do so, it will be at the secondary market. The NGX mentioned above is the market of secondary market securities.
3. Importance of Capital market
3.1 Serves as source of passive income
Through capital gains, dividends, and interest surplus fund providers can earn passive income from the market.
3.2 Provide long term funds to businesses and government
Businesses and governments who source for funds through the capital market get them on a long term basis. Some of the funds are not returned back unless the entity liquidates. For example ordinary equity is never returned to the shareholders. The shareholder can either sell them or continue to earn dividends.Â
3.3 Provides metrics that are used as economic barometer
Metrics such as the All Share Index (ASI) is a good economic barometer to measure a country's growth and development.
3.4 Employment opportunities
Individuals with special knowledge on the capital market have the opportunity to work in the market and earn a living from it.
4. Conclusion
In conclusion the market provides a means for long term financing of projects and businesses. Securities such as equity and debt capital remain the primary font of the market providing the largest source of financing to businesses all over the world. And NGX remains the leading Intermediary till date in Nigeria.
Read:Â Money Market in Nigeria
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