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Capital market financing represents the financial market where companies can go and seek external funds for use in business operations. In developed countries, capital markets are often highly complex and intricate in the details associated with the movement of money. Different types of capital market financing are usually available for businesses, with the most common types being debt, bonds, and securities. Other capital market instruments may be available, such as derivatives of the three standard instruments for external financing. Governments typically attempt to regulate capital markets in order to maintain standards among financial institutions.
Debt is a very traditional form of capital market financing, usually available to all companies in a market. Financial institutions make loans to businesses for a given time period and require a certain amount of interest on the principal. Companies can receive this funding so long as they meet predetermined requirements for receiving loans. Financial institutions may not always hold loans made to companies for specific use; in some cases, the capital market allows for buying and selling notes on the secondary market. The efficient distribution of capital through these mediums is necessary to create stability among debt financing options.
Bonds are often the next level in terms of debt instruments in capital market financing. Large companies or organizations may use these items in lieu of loans from financial institutions. Bonds are debt instruments issued by a company to investors, which carry some basic terms similar to those of debt loans. The only difference here is that the company itself is responsible for repaying the investors who purchased bonds issued by the company. Again, specific government requirements are necessary for a company to meet when issuing bonds and using this form of debt financing for business purposes.
Stock is a form of equity investment into a company; in short, investors purchase ownership into a business through this financial instrument. Capital market financing through stock is a very common way companies secure outside funds for business use. In most cases, issuing stock is preferable to debt financing or bonds as investors tend to have fewer rights than other investment types. Once on the open market, a company’s stocks may trade among many different investors who look to make financial gains. Strong financial gains through the use of stocks and other equity investments can help a company make another stock issuance, which can increase funds from capital market financing.