The capital market facilitates long-term financial product transactions, including bonds and stocks. Organized security exchanges and over-the-counter markets are important elements. Stocks have two types of shares, common and preferred, while bonds can be less volatile. Different types of bonds include debentures, mortgage bonds, and junk bonds.
The term capital market refers to the network of procedures and institutions that facilitate long-term financial product transactions. They are typically sold from a corporation or government to investors, or traded between investors. There are several different types of capital market products, several types of bonds and stocks, sometimes called equity securities. In the United States, companies and investors can also store funds in US Treasury bonds and federal agency securities.
Two important elements of the capital market are organized security exchanges and over-the-counter markets. Organized security exchanges are physical locations where capital market products are traded. Any kind of trading deal that doesn’t happen on an organized security exchange happens on the over-the-counter markets. Financial managers have several options for payment arrangements when buying and selling securities in these markets, including checks, automatic transfers, electronic transfers, and cash accounts.
Stocks are some of the most popular commodities on the capital market. There are two basic types of shares, common and preferred. Common stocks are shares owned by a corporation sold on the capital market to investors. In return for the investment, the shares pay shareholder dividends that vary in amount depending on the overall financial health of the company. Stocks that are likely to pay higher dividends trade at higher prices.
Speculation about a company’s financial health changes the price of its shares, leading to the up-and-down trading prices common to many modern capital markets. Preferred shares cannot be sold publicly, and unlike common shares, preferred shares have fixed dividend payout amounts that do not vary based on the corporation’s position. Failure to pay dividends due does not require bankruptcy of preferred or common stock.
Compared to stocks, bonds can be much less volatile capital market products. Bonds are long-term notes held by lenders. Bonds often commit interest payments on the amount borrowed, and usually an eventual repayment of the principal debt. Some types of bonds include debentures, mortgage bonds, and junk bonds. Obligation is a general term for unsecured bonds.
When a company issues a second round of bonds before paying off the first, these debts are called subordinated debentures. These are riskier than regular bonds because the issuing company has more debt, but the interest payments are typically higher. Mortgages are bonds secured by real estate, making them generally less risky than bonds. Junk bonds are debt products that earn high interest, but have a low probability of full repayment of the principal debt.
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