Capital markets match those who have capital to invest with businesses, government entities and entrepreneurs seeking capital to underwrite their plans.
Capital markets most familiar to investors are the equity (stock) market and the fixed-income (bond) market.
Investment returns are affected by a variety of factors, including developments in the underlying economy and the financial strength of individual companies or public entities.
2022 was a difficult year for capital markets. It was a sharp contrast to the environment in 2020 and 2021 when stocks generated double-digit gains. Higher inflation and interest rates also represented a striking change for the bond market; 2022 concluded 40-year period characterized by low inflation, declining interest rates and stable-to-rising bond prices.
“When interest rates or inflation rise or fall, all asset prices change as well,” says Rob Haworth, senior investment strategy director at U.S. Bank. These and other economic factors can directly impact investment performance, and the environment remains challenging for capital markets as several variables could affect the future direction of the markets.
Capital markets match those who have capital to invest with businesses, government entities and individuals seeking capital to underwrite their plans.
While surging inflation and rising interest rates were driving forces in the market’s challenging 2022, we attribute continued market volatility in 2023 primarily to two factors:
The current capital market environment holds a number of questions about the trajectory of the economy. If interest rates continue to rise, the economy could continue to slow, which may be challenging for corporate earnings. Read more about our capital market perspective in our quarterly investment outlook.
Here are answers to some fundamental questions that may help you better understand capital markets and how they work.
Capital markets are a way to bring together individuals or institutions with money (also known as capital) they wish to invest, and various entities that seek money to underwrite costs to meet specific purposes. Capital markets also facilitate the issuance of securities on an exchange, where stocks and bonds are offered by those seeking capital, to be purchased by investors seeking to put capital to work.
For example, government entities regularly issue debt securities (bonds) to meet costs for major capital projects or, in the case of the federal government, finance day-to-day expenditures. Investors, in effect, lend money to the government entity by purchasing a bond. The borrower is required to pay interest on a timely basis and repay principal when the bond matures.
Capital markets are most commonly made up of stock and bond markets.
A key to capital markets is the issuance of securities. Entities seeking to raise capital issue debt or equity securities that are exchanged with investors. A corporation, for example, may issue new shares of stock, at a set price. However, once on the open market, the price of a security is generally always changing, reflecting demand in the market.
When raising capital, companies or entities may issue new shares of a stock or bonds, with proceeds from investors going directly to the issuer to meet its current financial purposes. Original issues of stocks and bonds are not always accessible to individual investors, such as in an initial public offering (IPO) of stock. Most individuals purchase stocks on the secondary market, where those who previously purchased stocks or bonds can re-sell the securities they hold.
There are similarities between the two; however, capital markets typically refer to the issuance of new securities to raise capital, while financial markets can refer to all forms of securities trading.
Financial markets encompass a wide variety of exchanges involving traditional securities like stocks and bonds, as well as other types of assets and contracts. Most individuals trade securities on the secondary market.
As you assess your own financial goals, understanding the current and anticipated performance of capital markets may help you more effectively position your assets to achieve your objectives. Discuss your circumstances with your financial professional to help determine the best steps to consider in today’s capital markets.
Our investment strategies are designed to weather all types of market cycles. Learn about our investment management approach.
Rather than trying to time the market, consider holding on to stocks and other securities regardless of market fluctuations.
Bonds are a common investment in times of economic uncertainty, but they also play an important role in diversifying your portfolio.