The capital market deals with the buying and selling of securities including stocks and bonds. The capital market conditions largely depend on the prices of stocks and bonds. There are various risks involved in the capital market investment that affect the capital market conditions.
The capital market risks, also termed as systematic risks, can be either market driven, industry driven or business driven. The risks may affect the stock and bond prices gravely. The capital market investors always need to be aware of the various factors that affect the capital market conditions.
The economists suggest that behavior of the capital market also largely depends on the whims of the investors. The investors may temporarily pull the stock prices resulting over-reaction in the financial market. The excessive optimism, or also known as euphoria, may thus pull up the stock price unduly high.
On the other hand, excessive pessimism may also drive the stock price to the lowest. In order to improve the liquidity and transaction feasibility, the capital markets undergo innovations and experiments.
The major contribution of the capital markets to the financial markets is to raise the capital. The corporations, companies, banks and governments issue stocks and bonds in order to raise funds. The capital market plays the base market for this. The conditions of capital market influence the overall condition of the financial market. While the fluctuation of stocks and bonds prices affect the conditions in capital market, the vise versa is also true. Depending on the condition of the capital market, the trading trends of the stock markets and bond markets may also vary.
The capital markets may be either primary market or secondary market. On one hand when the primary market deals with the newly issued securities, the secondary market trades the securities that have already been issued. The overall market trend of issuing the securities also affects the capital market conditions heavily.