A Capital Market denotes a network, wherein individuals or organisations, fulfil an economic function of transferring funds to those who wish to borrow money for productive purposes. Although they might seem similar to money markets, the key area of differentiation between the two lies in their long-term maturity. Capital market participants include Foreign Institutional Investors, Insurance Companies, Stock Exchanges, Financial Institutions, Corporates, Private Equity, Hedge & Venture Capital funds, Provident Fund Trusts + EPFO, Credit Rating Agencies, Mutual Funds, Depositary Participants, and Public Sector Undertakings.
Capital Markets can be accessed in two ways – Equity (money invested in return for ownership), and Debt (borrowed money that must be repaid). Individuals & households, corporations, and local, central and foreign governments contribute to the demand of the International Capital Market.
Types Of International Capital Markets
There are primarily two types of International Capital Markets, i.e., a Primary Market (organisations raising funds by issuing securities) and a Secondary Market (facilitating the buying and selling of such securities). A Primary Markets, also known as New Issue Market (NIM) involves governments and organisation trying to raise funds by issuing new securities by means of underwriting. It is beneficial for long-term capital. Primary Issue is wherein securities are issued directly to investors by the company, who, on receiving the money issue security certificates, to investors. Different ways to issue securities in this market include Initial Public Offering, Rights Issue and Preferential issue. Primary Market Intermediaries include Merchant Bankers, Underwriters, Bankers to Issue, Portfolio managers, Debenture Trustees, Registrars to an Issue and Share Transfer Agents. A Secondary Markets, also known as Aftermarket, Share Market or Stock Market denotes the buying or selling of previously issued securities. The main intermediaries are the stock brokers and sub brokers and the purpose here is to create liquidity in securities. Equity shares, debentures, government securities, SEBI risk management system, commercial papers and bonds are some of the products dealt in.
What Are Some Of The Main Components Of International Capital Markets?
- International Equity Markets: Companies whose stocks are traded outside their country of origin. The increase in the growth of such markets is due to the rapid advancement of developing markets, the escalating need to privatize, increasing dependence on investment banks and the rapid advance of technology that has increased efficiency and affordability.
- International Bond Markets: These consist of entities that sell bonds outside the home country. The bond can be of several types – Foreign Bonds, Euro Bond and Global Bond.
- Euro Currency Markets: It is a short term financing option for Euro currency loans. Eurodollar is the deposit of US dollars in any bank outside the U.S. an extension of this is the Euro Currency, which is the deposit of any currency outside its country of issue. Its appeal lies in the fact that there are no strict regulations involved and therefore involved lower costs.
- Offshore Centers: They are territories that have a few financial regulations and are essentially, tax havens. They are of two types – Operational centres (where extensive financial activities occur) and Booking Center (favourable tax/secrecy laws).
Why Are International Capital Markets Important?
One of the main purposes of capital markets is to create economies of scale and promote economic efficiency. On the international level, it denotes ease of buying and selling securities and seamlessly converting it into cash when necessary. It aids in immobilizing idle savings and channels it into a direction of more productive investment. They balance the supply and demand of funds driving financial security, thereby, ensuring optimal use of resources, which further helps in capital formation and development of the economy. The ‘lender’ attempts to utilize its money more productively and the borrower seeks to use to fund a purpose (say a business idea) and capital markets helps in this shifting of funds to achieve maximum efficiency of those funds. Without the existence of capital markets, the lender could have simply kept the money in a savings bank with fewer chances of better returns, and others, short of money, wouldn’t be able to build their businesses or homes to the way they deem satisfactory. In the same way, International Capital Markets function on a global level across national boundaries. They allow businesses to tap into the foreign markets with a lower borrowing cost and high returns as compared to a domestic capital market. This, additionally, helps in diversifying risks. It provides an avenue for long-term investment and continuous availability of such funds due to its liquid market, thereby enabling the potential of converting an asset into cash while keeping the principal value intact.