When companies need a greater amount of capital than their earnings or private sources can provide, they may turn to the public capital markets. In the U.S., that means going to Wall Street — shorthand for the financial markets.
Issuing
stock
and
bonds
are the primary public ways of raising capital. A company that issues stock sells shares of ownership in the company and becomes
publicly held.
That means the company has a fiscal responsibility to its shareholders, who have a vote in how the company is run and a right to benefit from the company’s success.
Once a company is publicly held it can also issue bonds to borrow money from investors, taking on the responsibility to repay the capital at some point in the future and pay interest for its use.
Public sources of funds in the capital markets generally involve far greater sums than private sources. But using this money means that a company takes on a number of new responsibilities in exchange for the cash infusion.
Muddy waters
In the technical definition, the term capital market refers to the marketplace where all securities with a term longer than one year are traded. That includes stocks and bonds.
On the other hand, money market is the marketplace where securities with a term shorter than one year are traded. That includes
U.S. Treasury bills,
or T-bills, short-term bonds, and commercial paper.
What may make both definitions a bit hard to follow
in the electronic age is that the marketplace in question isn’t necessarily
a physical place, as it once was. Nor is there a single market where
all the transactions in question occur.
Professor Samuel L. Hayes,
Harvard Business
School
Professor Samuel Hayes talks about the impact that international investors can have on the U.S. capital markets.
Capital markets in the United States may attract both savers and users of capital from abroad. This enhances the liquidity and efficiency of the markets and also creates additional economic momentum as the country’s financial services industry prospers. Overseas investors can also provide support for U.S. currency when there’s a current account deficit caused by U.S. consumers buying more goods and services abroad than international consumers are buying from the U.S.
If international investors pull money out of the U.S. economy, or invest at a slower rate, the capital markets may become less stable. Such a move could be prompted by concerns about the dollar’s value or other economic or political events that made the investors wary.
Issuing
Professor 