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From Wikipedia

A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market).

The capital market includes the stock market (equity securities) and the bond market (debt). Money markets and capital markets are parts of financial markets.

From investopedia

A market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds.

Both the stock and bond markets are parts of the capital markets.

My questions:

  1. Are the definitions for capital market from the two sources the same?

    If I understand correctly, in Wikipedia, capital market is defined by the length of holding the securities longer than a year, while it is not in investopedia?

  2. If I understand correctly, the opposite of capital market defined in Wikipedia is money market, since the holding length of securities is less than one year in the latter?

    What is the opposite of capital market, according to the definition in investopedia? Actually I don't quite understand the definition in investopedia, and an opposite concept will help to clarify it, I think.

  3. According to the Wikipedia's definition, why does stock market belong to capital market, given that stocks can be held less than one year too?

Thanks!

  • I think the Investopedia definition leaves some detail to desired. It isn't incorrect, it just isn't as precise as the Wikipedia definition. You should expect that not all sources are of the same quality and won't exactly say the same thing. Don't get too hung up on pedantic differences .. and if you want a great source, get a textbook. – Chris W. Rea Jun 22 '12 at 15:32
  • @ChrisW.Rea: THanks! According to the Wikipedia's definition, why does stock market belong to capital market, given that stocks can be held less than one year too? Also I haven't be able to find its definition in a book yet. – Tim Jun 22 '12 at 15:53
  • @Tim - The money raised - or provided - in a stock market is provided for longer than a year. For example, Facebook gets to keep the money it raised from its IPO for much longer than a year. Stock certificates, however, trade every day. – Muro Jun 22 '12 at 16:44
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    @Muro: So after IPO of a company's stocks, all the trading of the stocks will be traded between investors, and the company is not involved? – Tim Jun 22 '12 at 16:54
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    @Tim - Yes. If I own a share of Facebook, I can sell it to any interested buyer. The company is not involved in that transaction. – Muro Jun 22 '12 at 17:03
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Just to clarify, In wikipedia when it says

It is defined as a market in which money is provided for periods longer than a year

They are referring to the company which is asking for money. So for example the stock market provides money to the issuing company of an IPO, indefinitely. Meaning the company that just went public is provided with money for a period longer than a year.

The definition in Investopedia basically says the same thing Wikipedia does it is just phrased slightly different and leaves out the "for periods longer than a year".

For example Wikipedia uses the term "business enterprises" and "governments" while Investopedia uses the term private sector and public sector, in this context "business enterprise" is "private sector" and "governments" is "public sector"

So in the sense of the length debt is issued yes, money market would be the opposite of a capital market but both markets still offer a place for governments and companies to raise money and both are classified as financial markets.

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1) Are the definitions for capital market from the two sources the same?

Yes. They are from two different perspectives. Investopedia is looking at it primarily from the perspective of a trader and they lead-off with the secondary market.

This refers to the secondary market: A market in which individuals and institutions trade financial securities.

This refers to the primary market: Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds.

Also, the Investopedia definition leaves much to be desired, but it is supposed to be pithy. So, you are comparing apples and oranges, to some extent. One is an article, as short as it may be, this other one is an entry in a dictionary.

2) What is the opposite of capital market, according to the definition in investopedia?

It's not quite about opposites, this is not physics. However, that is not the issue here. The Investopedia definition simply does not mention any other possibilities. The Wikipedia article defines the term more thoroughly. It talks about primary/secondary markets in separate paragraph.

3) According to the Wikipedia's definition, why does stock market belong to capital market, given that stocks can be held less than one year too?

If you follow the link in the Wikipedia article to money market:

As money became a commodity, the money market is nowadays a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less.

The key here is original maturities of one year or less.


Here's my attempt at explaining this:

Financial markets are comprised of money markets and capital markets.

Money is traded as if it were a commodity on the money markets. Hence, the short-term nature in its definition. They are more focused on the money itself.

Capital markets are focused on the money as a means to an end. Companies seek money in these markets for longer terms in order to improve their business in some way.

A business may go to the money markets to access money quickly in order to deal with a short-term cash crunch. Meanwhile, a business may go to the capital markets to seek money in order to expand its business.

Note that capital markets came first and money markets are a relatively recent development.

Also, we are typically speaking about the secondary (capital) market when we are talking about the stock or bond market. In this market, participants are merely trading among themselves. The company that sought money by issuing that stock/bond certificate is out of the picture at that point and has its money.

So, Facebook got its money from participants in the primary market: the underwriters. The underwriters then turned around and sold that stock in an IPO to the secondary market. After the IPO, their stock trades on the secondary market where you or I have access to trade it. That money flows between traders. Facebook got its money at the "beginning" of the process.

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