Everything you need to know about the capital market
The capital market ensures the meeting between economic agents who have surplus resources and economic agents who have financing needs i.e., companies, the state, or local authorities. Since 1980, with deregulation and de-compartmentalization, new sections of the capital markets have appeared and outperformed traditional markets in terms of transaction volume. The capital market includes a long term market and a short term market.
Long-term capital markets:
1-The financial market:
A -Definition:
The financial market is the market where long-term securities are issued and traded, the maturity of which is generally greater than seven years.
B- Its compartments:
The financial market is based on the activity of two sections. A primary market which is essentially a borrowers market
C- The role of this market:
- The financial market allows a direct meeting between agents with excess funding and those with funding gaps.
- The negotiability of the securities presents itself for the holder a considerable advantage because it allows him in principle to be able to face a need for financing to come by selling the title.
In addition, as the price of the negotiable security varies from day to day on the secondary market, the latter allows the development of speculation, which consists of trying to take advantage of the difference between the current price of the security and its price.
D- Actors and securities involved in the financial market:
Financial market players:
Any agent wishing to either obtain capital to set up a business or finance a productive investment by issuing securities intervenes on the financial market and the main issuers of securities are:
- Production companies.
- The public treasury.
- The local collectives.
- Financial institutions, including banks.
The agents who finance the issuers of the securities are the capital providers, so there are three categories of providers:
- The savers
- The investors
- The risk-takers
- The categories of securities involved in the financial market:
The main securities involved in the financial market are stocks and bonds.
The action:
The action is transferable security, which has a double nature. It consists of a title attesting that its holder participates financially in the constitution of the capital of the company.
The holder of the share is called (the shareholder), who receives an income called (dividend).
It also constitutes, for its holder, a right in the company which is exercised in two ways:
Dividend right:
Constitutes the shareholder's compensation in return for the risk linked to the operation of the business. It is a right to profit, which is proportional to the ownership of the capital. For example, a 10% stake in the capital of a company gives the right to claim 10% of the amount of the profit, if it exists.
- Right to vote: look at the end.
The bond:
Negotiable debt securities (TCN) representing a fraction of an interest loan
Bonds are, therefore, financial products issued by companies or public authorities when a loan is paid for with interest.
E- The functions of the financial markets:
-The latter is essential to an economy because they organize the meeting between those who have funds (savers) and those who seek them (companies).
By draining the available savings that its holders wish to value the stock market (which is a commission responsible for managing and organizing the financial markets) makes it possible to issue credit and capital for companies seeking to develop and invest.
-The second main function of the financial markets is to allow listed companies to modify their financial structures, i.e., to transform the distribution of their capital between the various shareholders.
2-Derivative markets:
A - Definition:
in the mid-1970s, the USA began to deregulate its stock market system, which subsequently spread to other stock markets during the 1980s.
The objective was to increase the mobility of capital. So we saw a de-compartmentalization of the markets. This means removing regulatory barriers between the various national financial systems and opening up markets to the rest of the world.
- New financial instruments derived from assets have appeared.
There are two types of derivatives markets:
- The organized market (stock market futures market):
Derivative transactions are organized and registered with the stock exchange. For example, when an operator buys a contract from an operator B, the transaction is actually divided in two. A buys on the stock exchange, B returns on the stock exchange (clearing house).
So we say that the stock market is the buyer of all sellers and the seller of all buyers.
- The over-the-counter market:
This is the market on which the transaction is concluded directly between the seller and the buyer, and these are generally risky operations since they are not the subject of any control.
B - Derivative products:
Derivatives tend to grow in number and in sophistication; they are mainly used to hedge against interest rate risks:
- Futures contracts (future):
Commitment to buy or sell a product at a future date at a price agreed in advance, contras may relate to an interest rate, securities, currency, or raw material.
- Option contracts:
Right but not obligation to sell or buy a given quantity of an asset at a fixed price subject to the payment of a premium.
Options allow you to protect yourself against unfavorable changes in assets while retaining the possibility of benefiting from favorable developments.
- Swap contracts:
Cross-exchange of interest rates (variable-rate against fixed rate) or currencies by which two agents exchange the elements of their debts; this in order to hedge against the risks of fluctuation of an asset or to obtain better financial conditions.
3-The mortgage market (real estate):
A-Definition:
the financing of housing by banks poses the problem of their refinancing when most of them have only long-term resources.
In order to ensure a balance between financing and refinancing, there is the mortgage market, that is to say, to reduce and lengthen the duration of the cost of mortgage loans to individuals.
B - The participants:
- Lending organizations for mortgage loans.
- The mortgage refinancing fund.
C -The functioning of the market:
Lending institutions issue mortgage notes corresponding to loans granted to individuals, guaranteed by hypotheses and respecting the ordinary rules of the mortgage market, which they can refinance at any time from the mortgage refinancing fund (CRM).
The mortgage refinancing fund is owned by 18 credit institutions, with mortgage notes to its assets; it continuously issues compulsory securities listed on the stock market and with a very long lifespan (10 to 20 years).
Section 3: Short-term capital markets:
4-The money market:
A- Definition:
It is a short-term capital market; it is most often a central money market.
The money market is, therefore, the main place where the banks which make money can obtain the necessary supplies to deal with the leaks which arise from this function of money creation.
That is to say; it is the place of interventions of the central bank on bank liquidity. It is also a short-term liquidity market for all bank credit institutions; it is open to non-financial agents who wish to either lend or borrow liquidity.
B- Its sections:
We can distinguish two types of money markets:
b-1- the money market in the strict sense (interbank market):
it is the market where lenders and borrowers of bank liquidity meet, in other words, it is the supply and demand of the central bank money.
- The players in the interbank market:
These are banking institutions, credit institutions, and other institutions such as the central bank, the public treasury, the deposit funds.
- Among its organizations, there are those who play the role of lenders and those who are borrowers.
-There are other intermediaries who operate this market and who are:
- Interbank market agents (AMI):
These are the intermediaries between lenders and borrowers on the market. They are remunerated by a commission paid to them by the borrower; their function is to transmit information and put in contact the lenders and the borrowers.
- The main operators of the interbank market (OPM):
These operators are specialized in treasurer operations and intervene either to lend to others for the same maturity [interest rate is low] or else for a different maturity [the interest rate increases].
- Treasury banks (BT): or the rediscount house
They are specialized in treasury operations
, and intervene either for a loan to others for the mm maturity "interest rate is low" or for a differing maturity "interest rate increases."
Author: Vicki Lezama