Capital Market: Definition, Benefits, Types, And Instruments

Actually, what is the capital market? Understanding the Capital Market is a market that operates in an organized manner where there are trading activities of securities such as shares, equities, debt instruments, bonds and other securities issued by the government or private companies by utilizing the services of intermediaries, commissioners, and underwriters .

According to the Law, the meaning of the capital market is an activity related to securities trading and public offerings, public companies related to the issuance of securities, and institutions and professions related to securities.

In other words, the capital market is a liaison between investors (owners of funds) with companies or government institutions that need funds through trading long-term instruments (stocks, bonds, right issues, etc.).

Understanding of the Capital Market According to Experts

To better understand what capital markets (capital market) , then we can refer some expert opinion. The following is the definition of capital market according to experts:

1. Fahmi and Hadi

According to Fahmi and Hadi, the notion of the capital market is a place where various parties, especially companies sell shares and bonds, with the aim of the sale proceeds will be used as additional funds or strengthen the company’s capital.

2. Martalena and Malinda

According to Martalena and Malinda, the understanding of the capital market is a meeting place for demand and supply of capital, both in the form of equity and in the long term.

3. Tjiptono Darmadji and Hendy M. Fakhruddin

According to Darmadji and Hendy M. Fakhruddin, understanding the notion of the capital market is a market for a variety of long-term financial instruments that can be traded, both in the form of debt, shares, derivative instruments, and other instruments.

4. Sunariyah

According to Sunariyah, the notion of the capital market is a meeting place between supply and demand for securities. The place where individuals or business entities that have excess funds (surplus funds) invest in securities offered by issuers.

5. Irham

According to Irham, the meaning of the capital market is a market where capital funds such as equity and debt are traded.

Capital Market Benefits

As mentioned above, this type of market is very beneficial for companies and institutions to get long-term capital. According to Tjiptono, some of the benefits of this market are as follows:

  • Creating investment vehicles for investors and enabling diversification.
  • Can be a main indicator of a country’s economic trends.
  • Has a role as an optimal allocation of financial resources.
  • This market can be an alternative investment with potential benefits and risks that can be calculated through openness, liquidity, and investment diversification.

Capital Market Instruments

Following are some of the main instruments traded on the capital market:

No. Underlying Parent Instrument Derivative Instruments
1 Equity Common stock Right Issue
Warrants
Mutual fund
Preferred Stock Stock Options
Future Stock Index
Future Stock Index Options
2 Debt Government Bonds Convertible Bonds
Corporate Bonds Bond Options
Mutual fund

Unlike in America or in several other countries, some of the commodities or instruments mentioned above are not all traded. In general, investors in Indonesia only know stocks, bonds, and mutual funds. Until now, bonds from local governments have not yet been traded on the stock exchange.

Types of Capital Markets

According to Sunariyah there are four types of capital markets, including:

  • Primary Market, which is the place where the stock offering is opened by the issuer for the first time before trading in the secondary market.
  • Secondary Market, which is a stock trading place that has passed the offering period on the primary market.
  • Third Market, which is a place to trade shares outside the stock exchange.
  • Fourth Market, which is a form of securities trading between shareholders or the process of transferring shares between shareholders with a large nominal.

Types of Capital Markets

According to Sunariyah there are four types of capital markets, including:

  • Primary Market, which is the place where the stock offering is opened by the issuer for the first time before trading in the secondary market.
  • Secondary Market, which is a stock trading place that has passed the offering period on the primary market.
  • Third Market, which is a place to trade shares outside the stock exchange.
  • Fourth Market, which is a form of securities trading between shareholders or the process of transferring shares between shareholders with a large nominal.

Institutions Involved in the Capital Market

The following are a number of institutions involved in the capital market:

  1. Stock Exchange Members, namely securities trading intermediaries who have a business license from Bapepam and have the right to use the Securities Exchange system / facility in accordance with the rules.
  2. Securities Administration Bureau, which is the party that registers the ownership of securities and the distribution of rights related to securities.
  3. Stock Exchange, which is the organizer and provider of systems / facilities to bring together sellers and buyers.
  4. Issuer, a party that makes a public offering.
  5. Custodian, which is a provider of security services for securities and other assets related to securities and other services, including dividends, interest, etc., and completing securities transactions.
  6. Clearing Guarantee Institution, namely the organizer of clearing and guarantee settlement of stock exchange transactions.
  7. The Depository and Settlement Institution, namely the organizer of the central custodial activity for the Custodian Bank, Securities Company, and others.
  8. Investment Manager, which is the securities portfolio manager for clients.
  9. Minister of Finance of the Republic of Indonesia.
  10. Investment Advisors, which are parties who receive service fees as advisors related to securities trading transactions.
  11. Underwriter, which is a contract maker with an issuer to conduct a public offering for the interests of the issuer.
  12. Securities Trading Intermediaries, namely business players buying and selling securities for the benefit of themselves or other parties.
  13. The Company, namely LC in accordance with Law No. 1 of 1995 concerning Limited Liability Companies.
  14. Securities Companies, namely securities underwriters, securities trading intermediaries, and / or investment managers.
  15. Public companies, namely individuals who own shares of at least Rp3 billion, and are owned by at least 300 shareholders.
  16. Trustee, which is a party representing the interests of debt holders.

Thus a brief explanation of the notion of the capital market, its benefits, instruments and types, and the institutions involved in the capital market. Hopefully this article is useful.

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