Economics

Capital market explained with its functions

len Alfred Ajibola - 29th November, 2023 @ 11:03 AM

Topics in Economics

Types of capital market: Primary market and secondary market Capital market explained with its functions Basic tools for economic analysis: Graphs explained with its characteristics and importance Basic tools for economic analysis: Tables explained with its characteristics and importance Factors affecting population in economics Advantages of Inflation Disadvantages of Inflation Concept of Inflation in Economics Scheme of work for Economics, SS1, First Term Scheme of work for Economics, SS1, Second Term Scheme of Work for Economics, SS1, Third Term Functions of the Wholesaler Advantages and Disadvantages of the Wholesaler Wholesale Market: Who is a Wholesaler? Characteristics of the Wholesaler Retail Market: Who is a Retailer and Examples of Retailers Market: Types of Market What is a Market in Economics? Elasticity of supply explained with its types Supply Elasticity: Elasticity of Supply explained


Academic Questions in Economics

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_____ is defined as a gradual and sustained rise in price level of goods and services in relation to their availability.

  • A. Basis Point Rate

  • B. Hike Rate

  • C. Elastic Supply

  • D. Elasticity of Price

  • E. Price Inflation

  • F. Aggregate Supply

The wholesalers can bring about an economy of scale.

  • A. True

  • B. False

Which of the following statement isn't a characteristics of the wholesaler?

  • A. They may have to operate in specific areas or regions accorded them by the producer

  • B. They are often popular in the line of goods they supply

  • C. They are not risk bearers

  • D. They have good storage facilities

  • E. They often pay for goods supplied by the manufacturers in advance

  • F. They usually have business agents or brokers

The wholesalers act as the middlemen in supply chain.

  • A. True

  • B. False

Large retailers who buy directly from manufacturers are termed as _____.

  • A. Wholesale Retailers

  • B. Certified Retailers

  • C. Codified Retailers

  • D. Commodity Retailers

  • E. Manufacturers Retailer

  • F. Conspicuous Retailers

_____ is a market whereby the sellers buy goods in lesser quantities from the wholesalers and sells in bits to the final consumers.

  • A. Commodity

  • B. Retail

  • C. Wholesale

  • D. Labour

  • E. Common

  • F. General

Which of the following is not a financial market?

  • A. Money Market

  • B. Bond Market

  • C. Foreign Exchange Market

  • D. Virtual Market

  • E. Capital Market

  • F. Stock Exchange Market

A _____ market provides a platform whereby job seekers link up with employers in an attempt to be hired.

  • A. Wholesale market

  • B. Bond market

  • C. Physical market

  • D. Virtual market

  • E. Factor Market

  • F. Labor Market



Capital Market:

Capital market is considered a part of the financial system that focuses on accepting the money of investors (institutions and individuals) through the issuing of debts and equities (in the form of bonds and shares), with the aim of judiciously utilizing their money into generating more profit which are shared accordingly among the investors involved. The investors in capital market are present in both the public and private sectors of the economy.

Please read on black market here.

 

The capital market has two main types of securities. These are equity and debt securities; and both are forms of investment. You can think of securities as fungible financial instruments or assets that are traded in capital market in order to raise capital. Therefore, investors are open to incur profits, or risks in losses when they invest in these securities.

 

Equity (securities) are the shares owned by a corporation, or company. The buying of equity share from a specific company automatically attribute the investors as shareholders of the company. In this regard, equities are traded on the stock market, and investors own a portion of the company. The profits made by the company are appropriately shared among the shareholders.

Equities are often termed as shares, and they are undated financial assets issued by a corporation, company, or firm in order to acquire funding.

You can read on balance of payment deficit and balance of payment surplus here.

 

Unlike equities, debt are securities traded in the bond market. They involve the borrowing of money which is to be repaid with interest.

The bond market may also be termed as a debt or fixed-income market. Through this market, governments and corporations can raise sufficient capital to execute a project. For instance, the Nigerian government may issue treasury bonds which investors can buy in an attempt to fund a major infrastructural project. If this happens, then the government is obliged to pay the bondholders their principal plus interest at an appropriate time.

 

From the above introduction, capital markets are financial markets that unite buyers and sellers in order to trade various financial assets like currencies, bonds, stocks, commodities, and so on. In this regard, the biggest capital market in our world (as at the time of writing this article) include the New York State Exchange (NYSE), London Stock Exchange, American Stock Exchange, Frankfurt Stock Exchange, Shanghai Stock Exchange, Hong Kong Stock Exchange, and NASDAQ.

You can attempt Len Academy questions and answers in economics here.

 

The capital market is specifically a market for long-term investments. Meanwhile, recall that long-term debt securities and corporate equities are issued and traded in this market.

However, understand that the capital market is a crucial driver towards the development of any economy. Therefore, the market activities are properly regulated by one or more commissions. For example, the Nigerian capital market is regulated by the Securities and Exchange Commission (SEC). This is the apex regulatory body of the Nigerian capital market.

Please read on the concept of inflation in economics here.

 

Note: Capital market is quite different from the money market. An important point that distinguishes a capital market from money market is the fact that its debt securities are long-term, and are typically over a year, unlike the money market where short-term debts are bought and sold. Also, capital market is classified into the primary market and secondary market respectively.

Capital Market - Len Academy

Please read more on financial market, money market and other types of market here.

 

The capital market unite the corporations and investors through the issuance of debts and equities.

Any institution involved in the supply of (or demand for) long term debts and equities is considered a capital market.

 

Recall that the instruments through which the capital market achieve its goals are via the sale of securities such as bonds, stocks and mortgages.

Previously, when a government intend to raise a long-term financial structure, it will often sell bonds in the capital markets. In this regard, most governments utilize investment banks to oversee the process of sale of their bonds.

You can read on the principles of marketing here.

In recent times, most governments will likely bypass investment banks and put up these securities (bonds) online for direct purchase. Typically, the volume of securities to be sold online are quite huge, with the government eventually holding only a small amount of auction yearly.

 

Stocks, shares, and bonds are securities purchased by individuals with the aim of making profit through it; and they can act as evidence with regards to a part contribution of the total capital used in running an existing corporation. Therefore, the shareholders are expected to receive an appropriate dividend, which is their reward for contributing money as investment into the corporation.

Please read more on corporations here.

 

Functions of Capital Market

In summary, the capital market can serve the following functions:

  1. The capital market is utilized by corporations and governments to raise long-term capital through the issuing of stocks and bonds.

  2. The funds realized from capital market can facilitate economic growth of a nation.

  3. The capital market connect buyers and sellers to trade financial assets like stocks, equities and bonds.

  4. Investments in the capital market can reduce (or even prevent) the unnecessary and lavish spending of individuals.

  5. Individuals are presented with investment opportunities through the capital market.

  6. Since the capital market has high liquidity, individuals can easily buy and sell securities. This can help them meet their impromptu financial needs.

  7. Capital market may improve the risk management skills of individuals.

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Amazing facts in Economics


Notable points in Economics

A unitary elasticity of supply is seen when a change in price brings about a corresponding and proportional change in the quantity of goods or services supplied.

The graph below shows a unit elasticity of supply:
Unit Elastic Supply Curve - Len Academy

Below is an instance of a unitary elasticity of supply:

  • If a 100% increase in the price of wheat translates into a 100% increase in the production and supply of wheat, then the supply elasticity is said to be unitary elastic and its value is equal to 1.

Unitary elasticity is always equal to 1, that is: Es = 1

The supply curve runs diagonally and will pass through the center.

Supply elasticity is defined as the rate at which an increase in price of goods translates into its increased production and availability in the market. Supply elasticity is also termed as price elasticity of supply.

Consider the statements below:

  • If a 100% increase in the price of rice translates into a 100% increase in the production and supply of rice, the supply elasticity is said to be unitary elastic and its value is equal to 1.

  • If a 100% increase in the price of rice translates into a 50% increase in the production and supply (quantity) of rice, the supply elasticity is said to be inelastic and its value will be greater than zero and less than 1. In this case, the exact value is 0.5: (value of change in the quantity of rice divided by value of change in price of rice = 50/100 = 0.5).

  • Please read on supply elasticity here

The individual demand schedule is a table that shows the demand of a commodity that an individual (consumer) purchased at various prices, and at a particular time.

The table below shows an individual demand schedule:

Price in Naira (of a tuber of yam)

Quantity demanded (per week)

500

5

400

10

300

15

200

20

100

25

The market demand schedule is also referred to as an aggregate demand schedule, total demand schedule or composite demand schedule.

This is a table that shows the different commodities purchased by all the consumers or customers in the market.

The market demand schedule is the summation of the individual demand schedules, showing the demand of different customers for a commodity at a particular price. It is shown in the table below:

Unit price of commodity (Naira)

Quantity demanded by consumer A (QA)

Quantity demanded by consumer A (QB)

Market demand (QA +  QB)

50

20

15

35

40

40

30

70

30

60

45

105

20

80

60

140

10

100

75

175

 

From the above table, notice that when the unit price of the commodity was 50 Naira, consumer A demanded 20 quantities while consumer B demanded 15 quantities.

Please read more on demand schedule here.

Below are definitions of demand from the perspective of some notable professors:

The demand for goods is a schedule of the amounts that buyers would be willing to purchase at all possible prices at any one instant of a time.

Professor Mayers

Demand is the various quantities of goods that would be purchased per time period at different prices in a given market.

Professor Hibdon

The demand for anything, at a given price is the amount of it which will be bought per unit of time at the price.

Professor Benham

Generally, demand is defined as the willingness of a person, buyer or consumer to buy a specific quantity of goods or service at a given price and time.

From the above definitions, we can infer that the definition of demand is referenced to three major factors. These are:

  1. Quantity of Goods Demanded

  2. Price

  3. Time

Please read more on the concept of demand here.