But What Exactly Are Capital Markets?

Simplest Way to Understand this Seemingly Fancy Concept

Photo by East African Business Week

Let me take you through the simplest way to understand this seemingly fancy concept. Sometime we get swamped with trying to understand today’s sheer numbers on big screens and what financial gurus are explaining on national TVs, but things are much simpler than the way they are sometime presented.

Having had the pleasure to experience both the sell and buy side of the capital markets, I can summarise this whole concept in a short paragraph or two. I can tell you that capital markets have simply emerged as platforms where entrepreneurs and dreamers would come to pitch their next big plans and ideas for their enterprises in order to raise capital to finance them.

Then, investors would want to know, “If I give you the money to grow your great enterprise to the next level in exchange for equity, what happens when I want to liquidate my investment for the next big ideas?” Therefore, stock exchanges were created. These are places where great men and women would go take their company shares public to raise capital from investors through initial public offering (IPO) so that they go out there, solve problems and make the world a better place.  And then, the stock exchange would facilitate the trading of securities of those listed great businesses they build on an ongoing daily basis. This post-IPO trading provides exit liquidity for early investors and opens doors for long-term players looking for ownership in a well-run enterprise. That, in a nutshell, is capital markets.

Capital markets are very important for our free-enterprise economies to grow, especially in today’s environment where other alternative financing models are relatively very expensive. With rising interest rates environments, the cost of borrowing has skyrocketed; therefore the remaining healthy financing option for great businesses aiming for the next big leg up is taking advantage of capital markets.

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