Capital Markets and Market Participants
What the capital markets do
Capital markets move savings from surplus units (households, pension funds) to deficit units (companies, governments) and provide secondary liquidity so investors can exit without disturbing the issuer. Candidates must distinguish the primary market (new issuance: IPOs, follow-on offerings, bond syndications - cash flows to the issuer) from the secondary market (trading of already-issued securities - cash flows between investors).
Market structures
Know the difference between exchange-traded markets (centralised order books, transparent prices, clearing house novation) and OTC markets (dealer-quoted, bilateral, dominant in bonds, FX and swaps). Understand quote-driven versus order-driven venues, and the role of market makers who post two-way prices and earn the bid-offer spread.
Participants
Map each player to its motive: retail and institutional investors (demand), issuers (supply), brokers executing agency orders, dealers trading principal, underwriters bearing placement risk, custodians safekeeping assets, transfer agents maintaining registers, central counterparties, and regulators. Also know the buy side (asset managers, insurers) versus the sell side (banks, brokers).
Common traps
Questions often blur broker (agent, best execution) with dealer (principal, owns risk); primary with secondary; or money market (under one year, near-cash instruments such as T-bills and commercial paper) with capital market (longer-dated equity and debt). Watch for the claim that secondary trading raises new capital for issuers - it does not.
Rule of thumb
Ask: does the issuer receive cash? If yes, primary market; if no, secondary. Then ask: is the intermediary acting as agent or principal? Agent = broker, principal = dealer.
Worked example
A company sells 10 million new shares at 20 each through an underwriter; the shares then trade on an exchange. The 200 million raised is a primary-market transaction; the subsequent exchange trades are secondary and generate no proceeds for the company, only commissions and spreads for intermediaries.