The Role of Capital Markets in Capital Redistribution

THE ROLE OF CAPITAL MARKETS IN CAPITAL REDISTRIBUTION

Securities are any financial instruments that are traded on the stock exchange and that yield an income. Securities include bill of exchange, bonds, debentures, options, shares and stocks. The securities market is a market where securities are traded. The securities market can be divided into capital market and money market. The money market is the market where short term securities are traded to finance the working capital needs of corporations and provide governments with short-term funds. The capital market, on the other hand, the market where securities with more than a year’s maturity are traded. Capital markets are designed to finance long term investment by government, corporations and households; and they comprise investment banking firms, mutual savings companies, insurance companies and pension schemes.

Capital markets play a key role in the investment world. One of such roles is the redistribution of capital. By redistribution is capital is meant the mobilisation of capital and/or financial resources from savers to borrowers. Capital can be defined in several ways. In the general usage, capital refers to resources, including assets that fuels investment. Investment is only possible when there is capital; in essence, capital translates dreams into actual investments. Individuals, firms and government need capital to undertake their respective investment goals. However, capital (resources) is not always readily available. Capital markets thus help to redistribute savings (capital) to facilitate investment. They do this in several ways, including mobilising savings, transferring risks, ensuring continuous availability of capital, capital formation and provision of investment opportunities.

The primary role of capital markets is to mobilise savings for investment. Capital markets are financial intermediaries that bring together net savers and net borrowers; so that those who have money but have no...