The Capital Market Theory

In simply put words, the Capital market is a place where investment funds like bonds, equities and mortgages are traded. As per the capital market theory, the main objective of the capital market is to streamline investments from investors having surplus funds to the ones who are running a deficit.

The capital market comprises of the financial instruments that have long term maturity periods whereas in the money market the financial instruments have short or medium term maturity periods. The different types of financial instruments existing in the capital markets are credit market instruments, equity instruments, insurance instruments, foreign exchange instruments, derivative instruments and hybrid instruments. The money market instruments in the capital market on the other hand are federal agency securities, Treasury Bills, federal funds, commercial paper, negotiable certificates of deposits, bankers' acceptance, repurchase agreements, Eurocurrency loans, Eurocurrency deposits, futures and options as per the theory of capital markets.

Due to the very modern technologies used in its operation, the capital market in the US is very advanced. The New York Stock Exchange being the oldest is also the most prominent exchange in the US capital Market. The Federal Reserve System has an important role to play in the capital market by providing liquidity and managing the credit conditions in the US financial system.

According to the capital market theory, the long term capital by the companies is elevated through the issue of shares floated in the capital market in the form of Initial Public Offering. The funds that are raised in the capital market via the specialized operators is called the venture capital. Venture capital is a very important source of finance for the innovative companies. The derivatives like the options, futures, credit derivatives etc are traded in the capital markets.