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What Are the Advantages of Capital Markets?

By K. Kinsella
Updated May 16, 2024
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Capital markets provide both new and existing businesses with access to cash or capital. Businesses use this capital to cover day-to-day operating costs and to finance expansions. The advantages of capital markets include job creation, economic growth and technological innovation.

In many instances, capital markets take the form of stock exchanges on which firms market debt securities such as bonds, and equity securities like stocks. Bondholders are creditors who lend money to institutions for a set period of time in exchange for interest payments. Stockholders are the owners of publicly listed companies and the funds from stock purchases are reinvested in the firm. Most firms issue both stock and bonds; these securities are typically marketable, which means that the original purchaser of the security can sell it on to another investor at a later date. The advantages of capital markets such as stock exchanges include the fact that these locations provide a venue where those seeking finance can be connected to prospective lenders and investors.

Aside from physical venues such as stock exchanges, capital market transactions also include private investment agreements between individuals and businesses. Some such deals are brokered by private equity firms that introduce investors to firm's seeking capital. In other instances, a business owner may directly approach an individual and ask for a loan or a capital infusion. Many mainstream lenders are unwilling to finance start up firms or businesses engaged in speculative ventures. The advantages of capital markets also include the fact that high-risk borrowers can gain access to much needed funds.

Companies directly benefit from the capital markets because many firms would become insolvent in the absence of formal or informal investment marketplaces. The advantages of capital markets are also realized by employees of firms that grow and expand as a result of capital infusions. These individuals have more opportunity for career advancement and job promotion. Additionally, expanding firms open new plants and offices and along with new work venues, these firms also create new jobs. As firms grow, new technologies are developed and researchers and marketing agents are employed to create and develop these products.

When large numbers of companies begin to hire additional workers, the economy of a particular country or region starts to expand because those workers reinvest their money in the economy when they buy goods. This means that profit levels start to increase at retail and manufacturing firms and these companies often use these funds to expand operations and create more jobs. Additionally, some publicly traded firms pass on profits to shareholders in the form of dividend payments. Consequently, investors indirectly benefit from their capital investments when they receive dividend disbursements.

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Discussion Comments
By fify — On Mar 15, 2014

Creating jobs has to be the biggest advantage of capital markets. This is probably the one factor that affects standard of living the most. Capital markets also allow government to tax more and this gives government a bigger budget to use towards health care, education, etc.

By ZipLine — On Mar 15, 2014

There are definitely many advantages of capital markets. I'm not an expert on economics but I think that the success of emerging markets like China, Brazil and India are partly due to capital markets. If it weren't for the opportunities that capital markets provide for investors, these markets would have a much harder time developing. But as of 2014, they are on their way to being among the most developed economies of the world.

Of course there are disadvantages to the system a well. Although capital markets create new opportunities, those opportunities have to be used wisely in order for an economy to grow in a sustainable way. The capital and growth made form investment must be reinvested in markets and industries that can grow and provide jobs. Problems like corruption must be controlled and prevented. Otherwise, a country will not benefit as much as it can from capital markets.

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