A Profile of Capital Markets

The process of transferring funds from household, business, and governments with surpluses to those with deficits involves far more than the collection and disbursement of funds. For each loan or security issue, lenders must evaluate the credit standing of borrowers; interest rates and terms of payment must be arranged. Moreover, since individual lenders frequently shift from a surplus position to a deficit position, or change their view about the prospective value of securities, there must be facilities for trading in existing securities. These processes are carried out through a variety of arrangements that bring borrowers and lenders together.

You can take a tour of a stock exchange, but most other financial markets do not have physical identity. They exist in the form of organizations that buy and sell securities and well-established arrangements for bringing buyers and sellers together. The market organization for each type of transaction reflects the characteristics of the loans or securities involved and the numbers of buyers and sellers involved in the market. Security markets are usually classified as primary markets, for new securities, and secondary markets, for trading in old securities. They are also divided between open markets, where buyers and sellers compete in a kind of auction market, and negotiated markets, where borrowers negotiate terms with lenders directly. Markets are also divided into short-term markets for bank loans, Treasury bills, and other short-term securities and long-term markets for bonds, stocks, and mortgages.

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