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The capital market is a diverse financial market that provides investment opportunities in various assets such as companies, governments, and projects, each carrying its own set of risks and rewards.
This article will outline the key ideas of the capital market to equip you with the essential information needed to make the most of its opportunities.
If this subject grabs your attention, continue reading!
What does the term “capital market” refer to?
The capital market is where various financial assets, like stocks, bonds, and derivatives, are traded, enabling entities to raise funds for growth, projects, and operations.
It serves as a link between individuals seeking funding for projects and investors looking to invest, essentially dividing the financial system.
The capital market acts as a middleman connecting investors with issuers, allowing investors to gain returns through financial assets while helping issuers secure funding for their operations or expansion endeavors.
The capital market facilitates the trading of assets and debt securities issued by companies, allowing for liquidity and capitalization without involving credit actions.
How does the functioning of the capital market operate?
Asset trading is facilitated by financial intermediaries like brokers and stock exchanges, who offer the required infrastructure for investors to conduct transactions effectively and transparently. The interaction between buyers and sellers dictates the trading price of assets, influenced by factors such as supply and demand, economic conditions, news, and significant events.
There is no necessity for a financial institution as securities are traded directly between individuals, with strict oversight provided by the CVM.
What types of assets are exchanged in the capital market?
The capital market is known for the variety of assets traded, which can be categorized as fixed or variable income.
Fixed income investments are financial assets that offer a steady stream of payments to the investor and are typically issued by governments, corporations, and other entities to raise funds. Government bonds like Direct Treasury bonds are a common example of such investments.
Variable income assets, such as stocks, entail owning a portion of a company and offer returns based on company performance and market changes, in contrast to fixed income investments.
The mix of fixed and variable income in a portfolio can be appealing to balance stability and growth, making the capital market a strategic choice for investors with various goals.
Capital market organization
The capital market is organized with multiple participants to handle securities trading and ensure the security and efficiency of the overall process. Some key actors include:
Stock market
The stock market plays a crucial role as the central platform for trading various assets in a completely digital manner. Investors can purchase securities directly from companies and offer these securities to potential investors.
Intermediaries and vendors
Brokerage companies and distributors manage the trading of securities in the capital market and are typically fully digital. Following the Central Bank’s Joint Decision 17/2009, these entities now perform similar functions in the market, with no significant distinctions between them.
Financial organizations
Financial institutions are approved entities regulated by the Central Bank that facilitate money transfers between investors and borrowers, and also help safeguard investors’ funds.
Main
The primary market is where securities are first issued and distributed by companies, governments, and other entities to raise funds, while investors purchase these assets.
Market where investors buy and sell securities from other investors.
The secondary market is where investors trade assets that have already been issued, enabling original holders to sell their shares to others and transfer ownership of assets. Stock exchanges and electronic platforms facilitate the buying and selling of these securities.
The secondary market provides investors with the ability to easily convert their assets into cash, thus ensuring liquidity.
The primary market supplies the system with new assets and resources, while the secondary market allows investors to trade existing assets, offering flexibility.
Actions and the stock market
When you purchase a stock in the capital market, you become a shareholder in the company.
Only publicly traded companies have permission to engage in share trading on the capital market by B3, with all parties involved required to be identified at all times.
Shares are categorized as ordinary (ON) and preferred (PN). Ordinary shares grant voting rights and involvement in company decisions based on the ownership stake, while preferred shares have priority in profit distribution.
Capital market categorization
There are various methods to categorize the capital market in addition to the typical separation into the primary and secondary markets.
Marketplace
In this market, transactions involve assets and securities, and payment is made immediately upon completion of the transaction.
End of market
In the ultimate market, the price, deadline, and terms for a financial transaction are agreed upon in advance.
Future market – Market of the future
In the futures market, asset prices are revised daily based on market fluctuations.
Options market – Market for options
Asset rights or obligations discussions take place on the options market.
Derivatives market
In the derivative market, buyers and sellers engage in negotiations based on future price expectations for assets.
Financial market
The economy benefits from liquidity provided by the financial market, where short-term transactions take place based on fixed interest rates.
The monetary market plays a role in determining the selic rate and DI by facilitating the trading of various securities like treasury bonds and CDBs.
Investing in the stock market
Understanding fundamental financial concepts like asset types, risks, returns, and volatility is crucial for making informed decisions. It is important to research and become familiar with various market segments, such as fixed income and variable income, before beginning any investments.
Building an investment strategy is the next step after establishing a strong foundation. It includes setting goals, determining investment timelines, and deciding on risk tolerance. Diversifying your portfolio is crucial for spreading risk and maximizing returns in the long run.
Selecting the appropriate broker or financial institution is a crucial decision to make. The selected platform must be trustworthy, reputable, and provide research and analysis tools to assist you with your investments.
It is crucial to monitor the performance of your investments and make necessary adjustments once the strategy is set.
How to gather resources in the capital market
The first part of fundraising involves evaluating financial requirements to determine whether to issue debt, shares, or bonds based on the organization’s objectives.
After establishing the strategy, adhere to the regulations set by the Securities Commission (CVM) for conducting the offering. This could include creating prospectuses, sharing financial data, and meeting other criteria to ensure investor confidence and transparency. Selecting a reputable financial intermediary, such as a broker, is crucial in this procedure.
After issuing the securities, you can utilize the proceeds from their sale for various purposes, and the organization can access further resources in the secondary market if there is demand for its assets.
In summary
The capital market caters to various individuals by enabling fundraising and providing investment returns.
Investing in this market is not limited to experts. When you grasp the basic principles and carefully select where to invest your funds, the investment process becomes more achievable for everyone.
Companies can utilize securities issuance as a strategic financing tool, offering investors high-quality information in the process.
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