Capital market is the market for securities where either companies or the government can raise long term funds. One way that the companies or the government raise these long term funds is through issuing bonds, which is where a person buys the bond for a set price and allows the government or company to borrow their money for a certain time period but they are promised a higher return for allowing them to borrow the money, the higher return is paid through interest that accrues on the money that the government or company borrows. Another way that the companies or government can raise money in the capital market is through the stock market, most of the time you don’t see the government as a part of the stock market, but it can actually happen so we need to include them. But how the stock market works is that the companies decide to sell shares of their stock, which is basically ownership in the company, to ordinary people and other companies, as a way to raise money. The people who buy the stock are usually given dividends each year, if the company has agreed to pay out dividends, so that is another possible return on their investment. The capital market actually consists of two markets. The first market is the primary market and it is where new issues are distributed to investors, and the secondary market where existing securities are traded. Both of these markets are regulated. Example in Tanzania Capital Markets and Securities Authority (CMSA) is in charge of regulating the capital market.
Primary Market refers to the market, where the company lists security for the first time or where the already listed company issues fresh security. This market involves the company and the shareholders to transact with each other. The amount paid by shareholders for the primary issue is received by the company. There are two major types of products for the primary market, viz. Initial Public Offer (IPO) or Further Public Offer (FPO). Primary markets facilitate the issuance of new securities e.g., the sale of new corporate stock or new Treasury securities. Initial Public Offering (IPO) is the process in which the shares of the private companies are listed for the first time in the stock exchange for allowing trading of its shares to the general public.
The primary market is where securities are created. It’s in this market that firms float new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market. An IPO occurs when a private company issues stock to the public for the first time. The securities are firstly offered in the primary market to the general public for the subscription where a company receives money from the investors and the investors get the securities; thereafter they are listed on the stock exchange for the purpose of trading
Once a company gets the security listed, the security becomes available to be traded over the exchange between the investors. The market that facilitates such trading is known as the secondary market or the stock market. Secondary markets facilitate the trading of existing securities e.g., the sale of existing stock. Securities traded in secondary markets should be liquid.
The secondary market is where securities are traded after the company has sold its offering on the primary market, it is also referred to as the stock market. Example of secondary markets are New York Stock Exchange (NYSE), London Stock Exchange, and (NASDAQ) are secondary markets, Dar es Salaam stock exchange (DSE), Nairobi Stock Exchange (NSE) etc. The defining characteristic of the secondary market is that investor’s trade among themselves without the involvement of the issuing companies. In this market existing shares, debentures, bonds, options, commercial papers, treasury bills, etc. of the corporates are traded amongst investors. The secondary market can either be an auction market where trading of securities is done through the stock exchange or a dealer market, popularly known as over the counter where trading is done without using the platform of the stock exchange. It is also referred to as the stock market.