Capital Market Theory

By: EconomyWatch   Date: 23 November 2010

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In studying the capital market theory we deal with issues like the role of the capital markets, the major capital markets in the US, the initial public offerings and the role of the venture capital in capital markets, financial innovation and markets in derivative instruments, the role of securities and the exchange commission, the role of the federal reserve system, role of the US Treasury and the regulatory requirements on the capital market.

The market where investment funds like bonds, equities and mortgages are traded is known as the capital market . The financial instruments that have short or medium term maturity periods are dealt in the money market whereas the financial instruments that have long maturity periods are dealt in the capital market.

The issues that have been mentioned above to explain the capital market theory may be discussed under the following heads:

Role of the Capital Market

The main function of the capital market is to channelize investments from the investors who have surplus funds to the investors who have deficit funds. The different types of financial instruments that are traded in the capital markets are equity instruments, credit market instruments, insurance instruments, foreign exchange instruments, hybrid instruments and derivative instruments. The money market instruments that are traded in the capital market are Treasury Bills, federal agency securities, federal funds, negotiable certificates of deposits, commercial paper, bankers' acceptance, repurchase agreements, Eurocurrency deposits, Eurocurrency loans, futures and options.

Capital market in the US

The capital market in the US is very advanced and uses very modern technologies in its operation. The capital market instruments are either traded in the Over-the – Counter markets or in the exchanges. The New York Stock Exchange is the oldest and the most prominent exchange in the US capital Market.

Initial Public Offering and the role of Venture Capital in the capital market

The companies raise their long term capital through the issue of shares that are floated in the capital market in the form of Initial Public Offering. The venture capital are the funds that are raised in the capital market via the specialized operators. This is also a very important source of finance for the innovative companies.

Markets in Derivatives

The derivatives like the options, futures, credit derivatives etc are traded in the capital markets.

Role of the Federal Reserve System and the US Treasury

The Federal Reserve System plays an important role in the capital market by providing liquidity and managing the credit conditions in the US financial system. The US Treasury operations seal the gap between the cash inflow and outflow, thereby, providing liquidity to the US capital Market.

More details on the capital market theory is provided by sites like answers.com, investopedia.com etc.



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