What Are the Different Types of Capital Market Systems?

Capital market systems are open markets where individuals and businesses can go to obtain money for certain activities. For example, a company may need outside funding for a new project that takes a large amount of capital, which the company most likely does not have in its coffers. The most common types of capital market systems include the bond, stock, and commodity markets. Other capital markets also exist, such as insurance, derivatives, and foreign currency exchanges. Most individuals and companies can freely enter the market and engage in investment activities that result in financial returns for each party involved.

Bond markets are where debt instruments are issued by businesses and organizations, with bonds purchased by individuals and businesses. This may be a submarket in capital market systems that exchange a large variety of securities. Commodities, however, do not typically trade in the same capital market systems as bonds and stocks. Investors may prefer bonds to other securities as there is usually a bit more security attached to these investments if a company goes bankrupt. Certain bonds may also be safer than others, such as government bonds issued by a stable country.

Stock markets are often the largest capital market systems in advanced economic societies or similar nations. Here, companies issue shares that result in a share of the business profits and a piece of ownership in the company. These investments tend to be riskier than bonds in most cases; the upside to stock, however, is that stocks can provide much more financial rewards than bonds. These markets are among the most common when a large company or organization needs to raise capital for business projects. The initial public offering for stocks tends to bring in large investment firms into the company’s cadre of investors, allowing the business to engage in many large projects.

Commodity capital market systems may be less popular with individuals and companies when compared to bond or stock markets. In a commodities market, investors buy and sell goods, such as coffee, oranges, soybeans, and many other types of natural goods. Making money is still a point here; however in most cases, few businesses outside of the financial services industry may engage in the trading of commodities. Capital market systems that include a commodities submarket may not be present in smaller countries or those with less advanced economies. Most companies do not find this market a good source for funds that relate to the financing of business projects.