Capital markets can generally be broken into two categories: primary markets and secondary markets. A primary market is one where entities issue new securities, while a secondary market is where securities are resold to other investors.
Depending on the type of security being sold, there are multiple processes and entities that monitor and oversee issuance. Federal agencies including the Securities and Exchange Commission monitor transactions. Required public documentation informs investors of the use of the capital being raised by the organization borrowing the money. In the case of bonds, an Official Statement provides potential buyers with the terms of the bond issuance and includes all necessary information to make an informed investment decision. Finally, outside organizations such as Moody’s Investors Service monitor the risk of repayment of the debt.
Example:
A city has decided to raise capital to build a new government building. As is often the case with these projects, city’s plan is to acquire the funds through a bond issuance to investors in the primary market.
In the future, if any of those original investors decide to resell their securities, they would do so in a secondary market.
What's important here?
For investors, the capital markets serve as a way to purchase investment securities to make a potential profit. For the organizations issuing securities, capital markets serve as a way to raise the capital needed to finance projects.
In the municipal bond market prior to the initial sale of a security the Preliminary Official Statement (POS) informs the buyer of the security about:
- The issuer, including its main business and financials
- The project being undertaken
- Other information – such as the credit quality of the issuer – that is needed to allow the buyer to make a fair decision on the value of the bond
