Explain the concept of a Capital Market



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Explain the concept of a Capital Market

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A Capital Market is a financial intermediary, where 2 or more people come together to buy and sell various financial instruments. There are many kinds of financial instruments: equity, debt, derivatives, commodities, foreign exchange, etc. Each of these financial instruments have their own capital market. For example, equity has a stock market, derivative has a derivative market, commodity has a commodity market, foreign exchange has a foreign exchange market. Typically capital markets are owned by governments mostly in some countries capital markets are owned by private companies. Examples of famous capital markets are the NYSE – the New York Stock exchange, the NASDAQ, the Bombay Stock Exchange, the London Stock Stock Exchange, etc. The purpose of the capital market is that a capital market provides liquidity, meaning if you own shares, or derivatives or commodities, the presence of a capital market guarantees that there is always somebody to buy your financial instrument if you want to sell it. Within a capital market, the other concept to understand is the price. When you want to buy or sell a financial instrument on a capital market, the most important criteria is price. This price is set by demand and supply factors in the capital market. Demand based on how many buyers are there to buy your specific financial instrument. Supply is based on how many other people like you are willing to sell the same instrument. So price is dependent on supply and demand and the capital market helps buyers and sellers to meet, to exchange shares.

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