Simply put, capital markets are financial markets that are used to raise long-term finance by issuing shares and bonds. This method of financing is generally implemented by companies and also by governments for their capital costs. The classification used when speaking about capital markets is primary and secondary markets. Moreover, the primary markets are the once where the companies or governments issues new stocks or bonds in order to raise long-term funds.
Long-term funds raised by companies
There are many times big discussions within a company when issuing shares or bonds when it comes to raising money for the firms long-term investments. This is among other things due to the fact that it involves risk taking. For instance, companies who are trying to avoid debt would preferably choose to issue shares, however, bearing in mind that this option weakens the power of existing shareholders. Moreover, investors who are not afraid of taking risks tend to prefer shares, whereas more careful investors will rather invest in bonds. If a firm goes bankrupted, having invested in a bond, the bond owners are given preferential payment over shareholders.
When it comes to investment banks and raising capital investment from investors on behalf of companies, they do this by using the underwriting method. In most cases the investment bankers will act as underwriters during a public offering. Also, in certain cases companies will directly issue shares and bonds to the public, thus saving on fees paid to investment banks.
Long-term funds raised by governments
Just like companies issue shares for long term finance, governments raises funds through debt and they sell their bonds in order to raise money for long-term investments. Furthermore, government institutions also use investment banks in order to easier sell their bonds. In this case, the investment bank acts as an underwriter and sells the bonds to investors through their network of brokers. Nevertheless, today one can see more and more governments in the developed countries that are selling their bonds directly to investors through computerized auctions and other governments have regular sale of bonds through other channels.