Capital markets are venues where investors offer their excess capital to those who seek it to finance projects or investments. Investors in capital markets include individuals, banks, and institutions. The money is sought by businesses, governments, and even individuals. There are two types of capital markets: equity securities traded on the stock market and debt securities traded on the bond market. While money invested in equity securities may not have returns, money invested in debt security is treated as IOUs and must be paid back with interest.
The capital markets also have other securities, including commodities, foreign exchange, and derivatives. Trading for capital markets occurs either in primary markets where a company issues securities directly or secondary markets where a security holder is responsible for the trading.
The markets mentioned above refer to publicly traded securities. However, there are also private capital markets where securities are held privately. Private securities have less liquidity, making it difficult for small investors to invest in them. Although private securities do not receive publicity or are not under public scrutiny, they offer greater returns.
With such varying capital market investment options, it becomes necessary for investors to carry out due diligence before deciding where to put their hard-earned money. Before making any investment, an investor should have a personal financial roadmap to help create goals and help identify their risk tolerance. People who may find it difficult to make financial plans should seek the help of professionals in this field. Considering that any investment comes with its share of risks, a professional is better placed to explain associated risks with different assets. For instance, investing in securities such as stocks means an investor may lose some or all of the principal invested.
Investors also need to understand the liquidity of an investment. Liquidity means how quickly an investment can convert to money. For an investor with a financial plan, it becomes easy to know where to invest as they can choose between long and short-term investments.
Understanding different investment options in the capital market also help in decision making. For instance, when buying a stock, an investor becomes a shareholder in a company and should find out crucial information regarding the company. Regardless of the timeline an investor wants to hold on to a share, they should analyze a stock performance compared to those of similar companies, size of the company, shareholder pattern, revenue growth, and dividend history, among other important information that helps make an informed decision.
The main aim of investing in capital markets is obviously to make returns. However, some risks affect an investment return, such as market risk, geographical risk, interest rate risk, and idiosyncratic risk. With all these potential risks, it is necessary for investors to have portfolios where they can have a variety of diversified investments. An investor should create an investment portfolio that includes stocks, bonds, mutual funds, and other investments that their financial plan allows. Properly allocating investments in a portfolio may require a professional's help to create a balanced mix of investments.
Additionally, investors should avoid situations that may lead to fraud. Many scammers are looking for unsuspecting people to deceive. Such con artists can use investment opportunities in the public domain to lure investors with seemingly legit opportunities. Investors should, therefore, not shy away from asking relevant questions that help establish a broker's experience and legitimacy.
