What are capital markets?

Capital markets are the mechanism that allows the exchange of money between companies and investors, companies and banks, and investors and banks as each party seeks to raise capital or put capital to work.

Mutual benefit

While companies generally rely on their sales to keep their businesses going and on profits to underwrite new growth, there are times when a company might need a large amount of capital — perhaps to expand operations or cover operating losses. The capital markets are a place to raise that money, letting companies offer ownership or promise repayment to investors in exchange for capital.

The capital markets also enable individuals to buy a home, pay for college, or start a business. They can take a loan from a bank that lends its depositors’ money to borrowers in exchange for the promise of future repayment and interest. It might help to think of the bank in this case as the investor, providing an individual with capital.

In both cases, the availability of capital can contribute to economic growth. Expanding businesses typically create new jobs, putting more money into circulation. Homebuyers spend money to remodel and furnish their properties, creating or sustaining jobs.

Of course, in any economy there are periods when investment capital dries up and the economy slows down — or when too much capital encourages inflation. Left unchecked by government or industry oversight, either situation could create serious problems.