Legal Definitions - capital market

A capital market is a financial market where individuals, companies, and governments can raise long-term funds for investment and where investors can buy and sell long-term financial instruments. These instruments typically include stocks (representing ownership in a company) and bonds (representing a loan to a company or government), which are generally held for periods longer than one year. The capital market facilitates the flow of long-term savings and investments between those who have capital to invest and those who need capital for growth or projects.

Here are some examples illustrating the capital market:

• Example 1: A Corporation Funding Expansion

  Imagine a rapidly growing renewable energy company that needs to build several new solar farms across the country. To finance this large-scale, long-term expansion, the company decides to issue new shares of its stock to the public and also offers corporate bonds. Investors, including pension funds and individual savers, purchase these stocks and bonds, providing the company with the necessary capital to fund its multi-year construction projects. This transaction occurs within the capital market, as the company is raising long-term funds (equity and debt) and investors are making long-term investments.

• Example 2: A Government Financing Infrastructure

  A national government plans to invest in a major upgrade of its public transportation system, including new high-speed rail lines and modernizing existing infrastructure. To fund this multi-decade project, the government issues long-term treasury bonds to domestic and international investors. These investors, seeking a stable, long-term return, purchase the bonds, effectively lending money to the government for many years. This exchange of long-term debt for capital is a core function of the capital market, enabling public sector projects that require significant, sustained funding.

• Example 3: An Individual Investing for Retirement

  An individual in their 30s wants to save and grow their wealth for retirement, which is several decades away. They decide to invest a portion of their savings into a diversified portfolio of stocks from various companies and long-term government bonds through their brokerage account. By purchasing these financial instruments, the individual is participating in the capital market, allocating their savings into long-term investments with the expectation of capital appreciation and income over many years. This activity helps channel individual savings into productive long-term uses within the economy.