Capital markets are markets for the buying and selling of medium and long term financial securities. SMEs can use this market to raise capital for medium and long term projects and expansions. It is ideal that SMEs use the capital market to raise money for all capital expenditure. Other forms of funding such as bank loans are more suitable for short term financing.
Firms who wish to raise capital for their businesses will list, or register, on the stock exchange and put a specific percentage or monetary value of their business up to float in the initial public offering (IPO). The value that is issued is the amount of the company that is available to be bought, sold, and traded on the market by public and private investors.
The value of the issue is divided into equally sized shares which represent the units of the company traded on the market. As share prices fluctuate as does the total value of the firm.
A security refers to any tradable financial asset. The financial assets traded on capital markets generally fall into two categories: equity securities or debt securities.
Equity is the value of an asset minus the value of any liabilities (or financial obligations to be paid) on the asset. Therefore an equity security is a financial asset which holds its own value less the value of any financial obligation made on the part of the investor in order to purchase the asset. The most common equity security is common stock i.e. a number of shares in the firm.
Debt refers to money borrowed from another party which is owed in repayment. Therefore a debt security is a financial asset purchased primarily through some means of borrowing. Examples of debt securities include loans (money borrowed from a financial institutions which must be repaid with interest), bonds (in which the issuer borrowers a principal amount of money from the bond holder and must pay back with interest), and debentures (an instrument for companies to borrow money and repay at a fixed interest rate). Debts are traded on the market in the same fashion as equities. Both firms and investors can make use of equity and debt securities when dealing in the market. As of April 2016 there are eight companies listed on the Ghana Alternative Market (GAX). Four of these eight companies have listed equity assets while the other four have listed debt assets.
Debt: Why would anyone borrow money to make money?
Firms can borrow money to reach the minimum capital requirements for listing. Depending on the terms of the asset, once sufficient capital has been raised the money must be repaid to the debt holder with interest.
Investors can borrow money to finance the purchase of common stock. As share prices increase, they make returns on their investments which can be used to repay outstanding debts. Returns in excess of the debt value are profits for the investor.
Capital markets are colloquially referred to in both singular and plural form (i.e. "the capital market" or "capital markets"). When one mentions the "capital market" singularly, it is with general reference to the several distinct and interconnected market places where financial assets are traded.
Capital markets can typically be divided into primary and secondary markets.
A primary markets is the market where securities are created. This is the initial market where firms first issue shares of their company to the public in the IPO. A secondary market is the market where previously issues securities are traded between investors. This is the larger market where the majority of activity occurs. Most of the casual public discourse about capital or stock markets, for example topics such as stock prices and share value, are with reference to the secondary market.
Furthermore market authorities, in Ghana this is the Ghana Stock Exchange (GSE), have their own methods of regulating the markets. GSE has divided its listing categories into two. The first listing category comprises the main GSE exchange; this Official List is for any eligible company. The second category is targeted at SMEs; this is the GAX. The GAX operates as a parallel though distinct market to the First Official List. Having the GAX operate as a distinct market means that movements in the First Official List will not directly shock GAX listed companies, although movements in the one market will inevitably reverberate across other markets, likewise stock markets trends have a notable influence on the wider economy.
There are clear benefits to be rendered from entering into capital markets. Firms can raise funds for their business expenses, increase liquidity in their assets, increase the company’s net worth, and render profits. However expectations must be controlled and anyone entering into the stock market should do so fully aware that there are risks involved. Shocks to demand and supply, variance in economic trends, and movements in other markets will influence domestic capital markets. Money can be lost as quickly as it is gained. It is important for firms to educate themselves and take the necessary precautions to protect their investments.
Firms: By listing with the stock exchange, firms provide the financial assets to be traded on the market.
Investors: Investors conduct the buying and selling thereby generating capital market activity. Investors generally work with the assistance of a professional trader or stock broker. Such professionals will belong to a financial institution.
Financial Institutions: Financial institutions act as intermediaries, working to connect buyers and sellers with profitable investments and to efficiently allocate funds on the market often for a fee. Some financial institutions also offer programmes to assist firms with the listing process.
Ghana Stock Exchange (GSE): GSE is the authority over Ghana’s principal stock exchange.
Securities & Exchange Commission (SEC): SEC is the regulatory authority over the securities market in Ghana. The stock exchange is just one, albeit the principal, securities market which SEC has a hand in regulating. SEC and GSE work very closely together.
Bond: a loan of a principal amount of money to an entity to be repaid at either a fixed or variable interest rate
Common stock: ordinary shares in a company
Debenture: a form of loan in which a company can borrow money and repay at a fixed rate of interest
Debt: money borrowed that must be repaid with interest
Equity: the value of an asset minus the value of any liabilities on the asset
Initial Public Offering (IPO): the act in which a newly listed firm first issues shares of the company to the public
Interest: an additional fee on a sum of money that has been borrowed, usually either a fixed or variable percentage of the principal or compounded sum
Issue: the setoff financial securities that a company offers for sale to the public
Liability: financial obligations to be fulfilled e.g. debt or loans to be repaid
List: (verb) to register a company on the stock market; (noun) the catalogue of companies which have registered on the stock market
Loan: a sum of money that is lent with the condition of repayment with interest
Principal: the value of the initial amount of money borrowed
Securities: tradable financial assets
Shares: portions or units of an asset (usually a company) available for trading on the stock market
Stock exchange: the market for the buying and selling of stock (shares) and financial securities
Trading: the buying and selling of securities on financial markets