What Is the Capital Market

Why the capital market exists

Every economy has two broad groups of participants: those who have spare money they do not need right away, and those who need money to start, expand or modernize a business. A family that saves part of its income each month has surplus resources; a company that wants to build a new factory needs financing. The capital market is where these two groups meet.

Unlike a bank loan, where the bank is the intermediary between depositors and borrowers, on the capital market the investor finances the issuer directly: they buy a part of the company (shares) or lend it money (bonds). In return, the investor also takes on the risks tied to how that issuer performs.

The primary market and the secondary market

The capital market has two "floors", and understanding the difference between them is essential for any beginner.

The two markets depend on each other. Few investors would buy shares at issue if they were not confident they could resell them later. It is precisely the ability to sell on the secondary market that makes the initial investment more attractive.

The role of the capital market in the economy

A well-functioning capital market benefits not only investors and companies but the economy as a whole. Its main functions are:

• Mobilizing savings – it turns money that would otherwise sit idle into productive investment.
• Financing companies and the state – it offers an alternative or a complement to bank lending.
• Liquidity – it lets investors convert securities into cash relatively quickly.
• Transparent price formation – the price results from the supply and demand of many participants.
• Transparency and good governance – issuers whose securities are admitted to trading have reporting obligations, which instills discipline.
• Risk sharing – the risk of a project is spread across many investors rather than concentrated in a single institution.

The capital market and other financial markets

The capital market is part of the wider financial system. Alongside it are the money market, where short-term instruments (usually under one year) are traded, the foreign exchange market, where currencies are exchanged, and the bank credit market. The capital market focuses on medium- and long-term financing.

In the Republic of Moldova, the capital market is regulated and supervised by the National Commission for Financial Markets (CNPF), and the Moldova International Stock Exchange (BIMx) is one of the infrastructures through which trading is organized. We will look at the role of each participant in detail in a separate lesson.