When companies and the government want to raise some money to fund their long term projects, they have various options to raise the funds – otherwise known as capital
- They could reinvest some of their previously earned and retained profits;
- They could borrow money from banks or other financial institutions;
- They could invite the public to invest in their projects or companies by injecting funds into them;
- And finally they could borrow money from the public.
It is the last two options that conceptualize the concept of capital markets. This is when a company or the government goes to the public to raise funds (capital) to finance their long term investments. The raising of this capital can be through borrowing or direct investment of the public in the company.
It then goes without saying that, there is a need for a ‘market’ where the public can ‘sell’ or lend their money to the company or the government that is ‘buying’ or borrowing the money; in order to use it in long term investments. This market where money is exchanged as the prime commodity is what we are calling the capital market.
The capital market can be divided into two sections:
- Stock Market – where stocks of a company are traded.
- Bond Market – where bonds (government and corporate loans) are traded.
Capital market can further be divided into two sections:
- Primary Market – where companies acquiring capital from the public for the first time trade their bonds and stocks.
- Secondary Markets – where existing company shares or bonds are traded through buying and selling of the same by the investors.
In Kenya, the capital market is regulated by the Capital Markets Authority (CMA). This body forms all the rules, regulations and policies to be followed and adhered to by all participants in the capital markets. The major player in the capital market in Kenya is the Nairobi Securities Exchange (NSE).
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