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Capital Market Instruments

What are capital market instruments?

            Capital market instruments are instruments used by investors to make a profit out of their respective markets. (Finance Maps, 2009). These instruments include stocks, bonds, debentures, treasury bills, foreign exchange, fixed deposits, etc. The market is composed of the primary and secondary market. Quite simply, the primary market is designed for new issues (IPO’s) and the secondary market is meant to trade existing issues (i.e. already established companies). Stocks and bonds are the two basic instruments used in these two markets. Bonds trade in their own market, a market referred to as the debt, credit or fixed income market. (Finance Maps, 2009). This market trades debt securities including debentures and t-bills.

How are capital market instruments used?

Capital Market instruments like the ones named all exist for one common reason; to generate funds for companies and corporations. In the case of t-bills, bonds capital market instruments also benefit many nationalized governments. In any market these instruments hold weighted value and are designed for different purposes. Typically, stocks are more volatile than bonds. T-bills are considered secured but yield less of a return than others. Stock instruments are traded among investors in auction, virtual and physical markets. The NYSE is a physical exchange and only stocks listed within that exchange could be traded. The NASDAQ is a virtual exchange and is electronically maintained with buyers and sellers being matched electronically for buying and selling. The NASDAQ operates in theory similar to the physical exchanges, however buyers and sellers are considered ”market makers” i.e. making a bid and ask price in order to buy or sell “their” share(s) of stock.

Which capital market instrument is the most important?.

            Every capital market instrument is important in its own way. Firstly, attraction to a particular instrument is also dependent upon an investors risk tolerance level. An example is that an investor with more conservative objectives may prefer to get involved with bond trading as opposed to the more volatile stock market. However I do believe that of all the capital instruments, the most important instrument tasking into consideration the economic times we are upon is stock. The stock market has an unlimited cap and truly makes the financial world tic. In October 2008, the size of the world’s stock market was estimated at $36.6 trillion. (Wiki, 2009). The stock market is instrumental in obtaining capital for new and existing companies, hence supporting the economy. Stocks are also liquid instruments (as opposed to bonds) and the stock market has proven to tie directly to the world economy including the housing market).

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