For the uninitiated, capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, contracts for differences on currencies, commodities and equities, and other financial assets. Buyers are those who seek capital, like businesses, governments, and individuals, and sellers are people or institutions with capital to lend or invest, like investors and banks.
The point of capital markets is to provide entities in need of finance for expansion or working capital requirements with an external source of funds. Capital markets raise funds by issuing shares and selling them to the public. Individuals who wish to invest in equity and preference shares will earn dividends while investors who wish to earn interest will buy bonds.
But does this brief answer to the question, “what are capital markets?” bring you any closer to understanding this concept? It comes close, but doesn’t fully acquaint you with this market. As a senior member of Loita Management Services, with over a decade’s worth of experience with the Loita Group, I am well placed to talk about capital markets and unpack their infrastructure to give you a better idea of how they could be used in and for your own business.
Unpacking the Infrastructure of Capital Markets
One of the common misconceptions is that capital markets and financial markets are one and the same, and while there’s some overlap, they are different. Financial markets are where all trades involving financial assets happen. Capital markets, on the other hand, are predominantly used to raise funding to be used for growth or in your business’ operations.
The key to understanding the capital market is to become familiar with its infrastructure. In broad strokes, capital markets are made up of primary and secondary markets.
A closer look at the primaries
In primary capital markets, new capital is raised via stocks and bonds that are issued and sold to investors. That’s why at times, this market is also called the new issues market. Any stocks or bonds issued on the primary market are subject to strict regulation and companies must file statements with the Securities and Exchange Commission (SEC) and other securities agencies for review, and must wait until their filings are approved before they can go public.
In my experience, small investors are often hindered from buying on the primary market because sellers want to sell as quickly as possible to meet their required volume. As a result, they focus on selling to larger investors who can buy more at once.
A second look at the secondaries
The secondary capital market is where traders and investors (not issuing companies) buy and sell previously issued securities among one another. Secondary markets include venues overseen by a regulatory body like the SEC and no new capital is received by the firm
Importantly, there are two different categories in the secondary market – the auction and the dealer markets. While dealer markets allow people, typically small investors, to trade through electronic networks, auction markets are where buyers and sellers gather in a single location and announce the prices at which they’re willing to buy and sell securities. Similar to what you see in the movies, with lots of shouting and chaos.
Capital Markets in Mauritius
In Mauritius, the FSC is the regulator of the non-bank financial markets, which comprises Securities Exchanges, clearing and settlement facilities and securities trading systems on the one hand and Collective Investment Schemes and intermediaries on the other.
At Loita Management Services, we assist our clients to apply for a full investment dealer licence that will permit them to trade securities (such as commodities, equities, and bonds), CFDs, and FX on behalf of their clients. Our independence assures that we continuously put the interests of our clients first. Moreover, we’re able to competently help both small and big businesses overcome challenges with their working capital requirements, improve their transactional efficiencies, and succeed with their expansion plans.
By Shanil Ramtohul