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Capital market


The term used to describe the various sources of long-term capital needed both for the creation of new companies and for the development and expansion of existing ones. The Stock Exchange is not a provider of capital, but it is of vital importance to a healthy capital market because it provides a forum for transferring stocks and bonds raised elsewhere. The propensity to supply money in exchange for shares will obviously be influenced by the existence of a market in which they can be sold. There are various institutions, apart from banks, which specialize in engineering supplies of capital to industry - whether the recipient is in the U.K. or elsewhere and whether the funds are required in gold. dollars or some other currency.

Funds are normally raised by the issue of shares, bonds, debentures, loan stock, etc. The project may be public or private, government-backed or government-sponsored, or it may be quite independent. If the help of state bodies such as the National Enterprise Board, National Economic Development Council, Industrial and Commercial Finance Corporation, etc., is not wanted then the problem of raising capital is normally handed over to an Issuing House or a Merchant Bank which will decide on the most appropriate way to raise the monies required, often employing the aid of an underwriter.

There are too many ways of raising capital to be enumerated here though reference might be made to other terms defined, such as prospectus; rights issue; placing; offer for sale; bonds. Much depends on whether the funds are to be raised at home or abroad and on the location of the project in which they are to be invested. In the U.K. there ares state incentives to invest in certain areas.

One important point to note is that there is a difference in principle between the capital market, where long-term funds are sought, and the banks and the money market, which are more concerned with the provision of short-term finance.

Reference: The Penguin Business Dictionary, 3rd edt.