Discussion Question(s) #1

Please reply to this thread by or before Wednesday, day 2 with your

answers!
What is the capital market? How is the primary market different from the secondary market? In
your opinion, are these markets efficient? Why or why not?
What is the capital market?
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. Thus, this type of market is composed of both the primary and
secondary markets (Investopedia.com, 2009). The capital market refers to all institutions and
procedures that provide for transactions having maturity periods that extend beyond one year.
This includes term loans and financial leases, corporate equities, and bonds. The capital markets
are the organized security exchanges and the over-the-counter market. Capital markets are those
where (1) investors can buy and sell stock without incurring any transaction costs, such as
brokerage commissions; (2) companies can issue stocks without any cost of doing so;(3) there
are no corporate or personal taxes; (4) complete information about the firm is readily available;
(5) there are no conflicts of interest between management and stockholders; and (6) financial
distress and bankruptcy costs are nonexistent.
How is the primary market different from the secondary market?
A primary market is a market in which new, as opposed to previously issued, securities are
traded. This is the only time that the issuing firm actually receives money for its stock. Once the
newly issued stock is in the publics hands, it then begins trading in the secondary market.
Securities that have previously been issued and bought are traded in the secondary market. The
proceeds from the sale of shares in the secondary market go to the previous owner of the stock,
not the company that issued the stock. The only time the company receives money from the sale
of one of its securities is in the primary market.
In your opinion, are these markets efficient? Why or why not?
The system works well in the U.S. It helps business raise new capital. When a continuous
secondary market exists where prices are competitively determined, it is easier for companies to
float new security offerings successfully.
Reference
Investopedia. (2009). Capital Markets. Retrieved October 13, 2009, from
http://www.investopedia.com/terms/c/capitalmarkets.asp
Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2005). Financial Management:
Principles and Applications (10th ed.). Upper Saddle River, NJ: Pearson Education, Inc.