Capital Markets


Capital Markets are markets where long-term instruments are traded e.g. equities, preference shares, debentures etc.

A good example of a Capital Market is the Stock Exchange.


The main functions of the Stock Exchange are:

  • PRIMARY MARKET –  used to raise new finance/issue new securities
  • SECONDARY MARKET – trade in second-hand securities. This is where most of the day-to-day activity takes place.
  • SHARE SWAP –  securities used as consideration in takeover of other companies


The main providers of capital are:

  • Pension Funds
  • Insurance Companies
  • Investment Trusts
  • Unit Trusts
  • Other Financial Institutions
  • Overseas Investors
  • Venture Capital Organisations
  • Business Expansion Scheme Funds Individuals

There are many reasons why a company may be floated on the Stock Market (“Going Public”).  Chief among these is access to capital.

  • Advantages – Shareholders
    • Cash for some shares.
    • Wider market for remaining shares.
    • Shares perceived as less risky.
    • Ready share price available.
  • Advantages – Company Possibility of new funds.
    • Better credit-standing.
    • Ability to “swap shares” on a takeover.
    • Ability to issue shares more easily at a later date.
    • Reduced risk & greater marketability leads to lower cost of capital.
    • Extra status.
    • Possibility of share options for top employees.
  • Disadvantages
    • Costs can be quite high.
    • Compliance with stringent regulations.
    • Dilution of control.
    • Additional administration.
    • Extra scrutiny of profitability/performance.



Some company shareholder(s) take a company from public ownership back to private ownership. This happens when the major shareholder and possibly founder finds compliance with the rules governing public limited companies and reporting to shareholders expensive and time-consuming.  Also public ownership also confers a pressure to maintain share price through short-term profits or dividends. Where the major shareholder is also chief executive officer or managing director this can be a disincentive to public ownership.



A market is generally regarded as efficient if the following are present:

  • Prices immediately reflect all relevant available information
  • No individual investor dominates the market Transaction costs are not too high to discourage trading

Are the markets efficient?   The Efficient Market Hypothesis (EMH) has been developed to test different levels of efficiency.   [Note:  Hypothesis is defined as a supposition put forward as a basis for reasoning or investigation.]

The Efficient Market Hypothesis tests three degrees of efficience

  • Weak Form Efficiency

Prices reflect the information in past stock prices.

  • Semi-strong Form Efficiency

Prices reflect past price information


All publicly available information.

  • Strong Form Efficiency

Prices reflect past price information


All publicly available information


Inside information

Most of the research suggests that capital markets are semi-strong-form efficient but not quite strong-form efficient.


(Visited 29 times, 1 visits today)
Share this:

Written by 

Leave a Reply