Capital Markets

• Author: Surendra Kaushik
• Pages: 74-77

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The capital market provides financing to meet the denomination, liquidity, maturity, risk (with respect to credit, interest rate, and market), and other characteristics desired by those who have a surplus of funds and those who have a deficit of funds. The capital market as a whole consists of overnight to long-term funding. The short to medium end of the maturity spectrum is called the money market proper, and the long end is identified as the capital market. The financial instruments range from money market instruments to thirty-year or longer bonds in credit markets, equity instruments, insurance instruments, foreign-exchange instruments, hybrid instruments, and derivative instruments. Since about 1960 an explosion of innovation in the creation and development of instruments in the money and capital markets has occurred in both debt and equity instruments.

Some of the important (by volume) money market instruments are Treasury bills and bonds, federal agency securities, federal funds, negotiable certificates of deposits, commercial paper, bankers' acceptances, repurchase agreements, eurocurrency deposits, eurocurrency loans, futures instruments, and options instruments. Similarly, some of the key capital market instruments are U.S. securities; U.S. agency securities; corporate bonds; state and local government bonds; mortgage instruments; financial guarantees; securitized instruments; broker-dealer loans; foreign, international, and global bonds; and eurobonds.

THE CAPITAL MARKET IN THE UNITED STATES

The capital market in the United States is highly developed, marked by sophisticated technology, specialized financing institutions and functions, wide-ranging geographic locations, and continuous innovation in financial products and services to meet the needs of financial investors and those seeking to acquire funds. There are both direct and indirect markets. Corporations, for example, engage in direct finance when they invest in one another's paper directly without the services of brokers and other specialized intermediaries, similar to the proverbial entrepreneur getting funds from an uncle. Most of the financing in the United States, however, is done indirectly through financial intermediaries who substitute their credit for the credit of the borrower (user) of funds. The total amount of credit for 2005 in the United States was projected to reach approximately $3,000 billion, of which debt instruments accounted for $2,700 billion and equity instruments (net) for $300 billion.

Money and capital market instruments are traded directly among participants, in the over-the-counter markets and in organized exchanges. Many of the exchanges specialize in the type of securities traded, thus giving focus and depth to that instrument or market. The major U.S. exchanges are the New York Stock Exchange (NYSE), Philadelphia Stock Exchange, Pacific Stock Exchange, Boston Stock Exchange, Cincinnati Stock Exchange, Midwest Stock Exchange, Chicago Board of Trade (CBT), Chicago Mercantile Exchange (CME), International Money Market, National Association of Securities Dealers

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Automated Quotations System–American Exchange (NASDAQ-AMEX), Globex, Archipelago, and DMA & NYFI.

The regional exchanges—such as Boston, Cincinnati, the Midwest, the Pacific, and Philadelphia—each list a small number of regional companies to facilitate their raising of capital in the market. The national/international markets are the NYSE, NASDAQ-AMEX, CBT, CME, Archipelago, and DMA & NYFI.

The NYSE, organized by twenty-four brokers in 1792, is the oldest exchange in the U.S. capital market. The first traded company on the NYSE was the Bank of New York. It is still traded today, but has not been continuously listed on the NYSE. The NYSE states its mission as:

To add value to the capital-raising and asset management process by providing the highest-quality and most cost-effective self-regulated marketplace for the...