capital markets
Capital markets are the electronic and physical markets in which bonds and other financial
instruments such as stocks and commodities are sold to investors. Institutions such as
governments and corporations use the capital markets to raise money through public offerings of
bonds and stocks or through private placements of securities to institutional investors such as
pension funds and insurance companies.
Capital
Capital’s Role in Growing the U.S. Economy
In the context of the securities industry, capital describes the funding needed by businesses to help
them grow and expand. The securities industry helps raise these funds for businesses by selling
investment tools (such as stocks and bonds) to investors. Capital markets refer to the marketplace in
which capital-raising transactions take place and these financial tools are traded.
The securities industry performs two unique functions that are vital to economic development. First,
it serves as an intermediary to match those who have capital with those who seek it. Those who seek
capital use it to grow and expand their businesses, in turn creating jobs and providing other benefits
to the U.S. economy. Second, the industry advises clients and investors on how to manage their
capital investments—helping them raise their living standards by reaching financial goals related to
housing, education, retirement, and other important areas.
Securities firms also bring liquidity into the market through their role as market-makers. Liquidity
matters because it lets investors convert assets into cash easily without creating volatility (a measure
of stability) in the market. This efficiency in turn allows corporations and government agencies to
readily raise long-term capital at fair prices. A high level of liquidity is one foundation of an effective,
efficient market.
bond
(1) The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a
formula for determining that rate, and maturing on a date certain, on which date and upon
presentation a fixed sum of money plus interest (usually represented by interest coupons attached
to the bond) is payable to the holder or owner. A municipal bond issue is usually comprised of
many bonds that mature over a period of years; (2) For purposes of computations tied in to “per
bond,” a $1,000 increment of an issue (no matter what the actual denominations are); (3) Bonds
are long-term securities with a maturity of greater than one year.
broker
A firm or person who acts as an intermediary by buying and selling securities to dealers on an
agency basis rather than for its own account.
commission
The fee paid to a dealer when the dealer acts as agent in a transaction, as opposed to when the
dealer acts as a principal in a transaction (see “net price”). Commissions differ in how they are
calculated, such as a percentage of the value of a transaction or flat fee amount, and including
whether the investor is using a bank, brokerage or online firm. Investors should be sure to ask
and to understand what commission or other sales fees are charged by a broker or agent to make
an investment transaction, including if such information is not provided in writing).
common stock
A share representing participation in the ownership of an enterprise, generally with the right to
participate in dividends and in most cases to vote on major matters affecting stockholder
interests.
economic indicator
Statistical measures of current conditions in an economy. “Leading” economic indicators such as
those that track consumer confidence, factory orders, or money supply may signal short term
economic strength or weakness. “Lagging” economic indicators such as business spending or
unemployment figures move up or down as the economy strengthens or weakens. Economic
indicators together provide a picture of the overall health of an economy or economic zone and
how bond prices and yields might be affected.
economic risk
Economic risk describes the vulnerability of a bond to downturns in the economy. For example,
virtually all types of high-yield bonds are vulnerable to economic risk. In recessions, high-yield
bonds typically lose more principal value than investment-grade bonds. If investors grow anxious
about holding low-quality bonds, they may trade them for the higher-quality debt, such as
government bonds and investment-grade corporate bonds. This “flight to quality” particularly
impacts high-yield issuers.
inflation
The rate of increases in the price of goods and services usually measured on an annualized basis.
market price or market value
For securities traded through an exchange, the last reported price at which a security was sold; for
securities traded "over-the-counter," the current price of the security in the market.
marketability
A measure of the relative ease and speed with which a security can be purchased or sold in the
secondary market.
preferred stock
An equity security that is junior to the issuing entity’s debt obligations but senior to common
stock in the payment of dividends and the liquidation of assets. The dividend can be fixed or
floating and is usually stated as a percentage of par value. Preferred stock usually has no voting
rights and frequently has a mandatory or optional redemption provision.
Treasury Securities
U.S. Treasury securities are debt obligations of the U.S. government. These include bills, notes,
bonds, TIPS, and Savings Bonds. When you buy a Treasury security, you are lending money to the
federal government for a specified period of time. Treasury bills are short-term instruments with
maturities of no more than one year. Treasury notes are intermediate- to long-term investments,
typically issued in maturities of two, three, five, seven and ten years. Treasury bonds cover terms
of more than ten years and are currently issued in 30-year maturities. Interest is paid semiannually. For more information on buying Treasury securities see the government's website
www.treasurydirect.gov.
U.S. Savings Bond
U.S. Savings Bond A non-marketable bond issued by the U.S. Treasury in face value
denominations designed for individual investors. Since savings bonds are direct obligations of the
U.S. Government, the credit quality is the highest available. Each bond is a registered security for
which a record is maintained by the Bureau of the Public Debt. Interest from savings bonds are
exempt from state and local taxes, and unlike most investments no federal tax is due until the
bond is redeemed. Two categories of bonds are currently available for purchase-Series EE and
series I. For more information on purchasing savings bonds go to www.treasurydirect.gov.
volatility
The propensity of a security's price to rise or fall sharply.