Capital Market vs Stock Market
A corporation that needs to raise funds for business purposes will have to obtain such funds from either the stock markets or capital markets. Stock markets and capital markets are essential for the economic development of any country. These two concepts are easily confused by many because, when considering capital markets, it is a common mistake to leave out the debt component and concentrate on only the equity component of capital. In this article, the differences between these two concepts are clearly highlighted, and the types of securities issued under these markets are clearly explained.
Capital markets provide access to long term finance using debt capital and equity capital such as stocks, bonds, options and futures. Capital markets comprise of organized platforms for exchanges and over the counter markets, and the market is divided into two segments known as primary markets and secondary markets. The primary market is where securities are issued for the first time, and secondary market is where securities that have been already issued are traded among investors. It is pertinent to note that the capital markets consists the stock market as well as the bond market. The capital markets are under stringent regulations of the Securities and Exchange Commission, to ensure that securities traded are of good credit ratings so that no fraud may occur.
Stock market is a part of the capital market itself, consisting of the primary and secondary markets. The stock market is the platform on which shares are issued and traded among investors, providing an avenue for corporations to obtain capital for their expansion purposes and an opportunity for investors to obtain partial ownership of the firm, as well as decision making power in relation to the percentage of ordinary shares held in the company. Stocks that are sold in the stock market are listed in stock exchanges in relation to the country in which the stock are sold; for example, many of us have heard of the New York Stock exchange (NYSE), London Stock Exchange (LSE), Shanghai stock exchange and so on. The stock sold are also categorized into indexes that track the movement of a number of similar stocks, such as the NASDAQ -100 index that tracks the movement of 100 non financial companies that include companies such as Apple, Google, Dell, e bay and Intel.
What is the difference between Capital Market and Stock Market?
The stock market is a part of the capital market, and both these markets serve a common purpose of providing a mechanism under which a firm may raise capital for their business operations. A capital market is a combination of the stock market and the bond market issuing debt securities such as bonds and debentures, in addition to stocks. The Stock market, on the other hand, is the only platform for trading shares and is also known as the equity market. The securities traded on a capital market such as bonds have different financial characteristics than stock in that coupon payments need to be made, as well as the face value needs to be paid back on the maturity of the bond. As for stock, since it is an equity investment, once issued, the firm will hold onto the capital, and income for investors will be dividends and capital increments arising from the increase in the value of the stock during the holding period, which can be ultimately sold for a higher price.
In a nutshell:
Capital Market vs Stock Market
• Stock market sells equity securities, which are shares, and capital markets sell both equity and debt securities.
• The stock market is a component of the capital market, and both these markets serve the common purpose of providing opportunities for firms to raise capital.
• The capital raised from a stock market is purely equity capital whereas, in a capital market, one may raise equity capital as well as debt capital.