Capital market is a part of the financial market, where a supply and demand are formed for the medium and long-term loan capital.
The capital market has the following functions:
- First, it brings together small, isolated monetary savings of people, government departments, foreign investors, private sector, and creates great cash funds.
- Second, it transforms cash into loan capital, which is an essential part of external funding sources for the material production of the national economy.
- Thirdly, it provides loans to the government and public sector to resolve such important problems as the budget deficit, housing financing and so on.
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Credit market makes possible the movement, accumulation, distribution, and redistribution of loan capital between the sectors of the economy. Credit market is a mechanism, which establishes the relationship between businesses and citizens in need of funds and organizations and citizens that can give (lend) it under certain conditions. At the same time, credit markets are a synthesis of the different market tools of payment. In countries with developed economy, credit agreement are mediated, firstly, by credit institutions (commercial banks or other financial institutions) who borrow and provide loans and, secondly, by investment or similar organizations that provide production and movement of various debt commitments are implemented in a special equity market.
The capital market functioning allows businesses to solve problems both of investment resources for the implementation of real investment projects and effective financial investment (making long-term investments). Financial assets, traded in the capital market, are generally less liquid, and are typically characterized as having the highest level of financial risk and therefore a higher yield.
It should be noted that this traditional division of the financial markets into the money market and capital market is somewhat arbitrary under current conditions of their operation. This convention is determined by the fact that the current financial market conditions and emission technology of many financial instruments provide a relatively quick and easy way to transform some short-term financial assets into long-term and vice versa.
Describing certain types of financial markets on both above mentioned features, it should be noted that these types of markets are closely interrelated and operate in the same market space. All kinds of markets that serve different circulations of financial assets (tools and services), are simultaneously a part of both money market and capital market.
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