capital market

Examples of capital market in the following topics:

• Capital Market

  • A capital market is a financial exchange for the buying and selling of long-term debt and equity-backed securities.
  • A key division within the capital markets is between the primary markets and secondary markets.
  • Money markets and capital markets are closely related, but are different types of financial markets.
  • When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income.
  • The NYSE is one of the largest capital markets in the world.

• Capital and Technology

  • Firms add capital to the point where the value of marginal product of capital is equal to the rental rate of capital.
  • Firms may buy, rent, or lease infrastructure and tools in the capital market, but even if the firm owns these factors of production, the opportunity cost of using this capital is the foregone rent that the firm could receive if it rented the capital to somebody else rather than using it for production.
  • A firm decides how much of each factor input to use and how much output to produce based on the market prices for outputs and inputs, as well as exogenous technological determinants represented by the production function.
  • The value of marginal product (VMP) of capital is the marginal product of capital multiplied by price.
  • Firms will increase the quantity of capital hired to the point where the value of marginal product of capital is equal to the rental rate of capital.

• Defining Capital

  • In economics, capital (also referred to as capital goods, real capital, or capital assets) references non-financial assets used in the production of goods and services.
  • Physical Capital: capital that must be produced by human labor before it can become a factor of production (also referred to as manufactured capital).
  • It is a form of capital assets that is traded in financial markets.
  • The value of financial capital is based on the market perception of expected revenues and risk.
  • Social Capital is capital that is captured as goodwill or brand value.

• The Relationship Between Risk and Return and the Security Market Line

  • Systematic risk arises from market structure or dynamics, which produce shocks or uncertainty faced by all agents in the market.
  • In finance, the capital asset pricing model (CAPM) is used to determine the required rate of return of an asset, taking into account an asset's sensitivity to non-diversifiable or systematic risk.
  • Mathematically, the capital asset pricing model can be written as: E(Ri) = Rf + β(E(Rm) - Rf), where R is the return, E(R) is the expected return, i denotes any asset, f is the risk-free asset, and m is the market.
  • The SML essentially graphs the results from the capital asset pricing model formula.
  • The intercept is the nominal risk-free rate available for the market, while the slope is the market premium, E(Rm)− Rf.

• Objective, constraints and alternatives

  • These include profits, utility, sales, market share, income, growth,...With in a firm different individuals may have different objectives.
  • The CEO may want to maximize profits while the Vice president of engineering may want to minimize the cost per unit and the person in charge of marketing may want to maximize the growth in sales or market share.
  • In a market setting, competing objectives of individuals is believed to be reconciled by voluntary transactions or exchanges.
  • For instance, a firm may try to maximize market share (objective) subject to the constraint that they earn a 12% return on capital investment.
  • Alternatively, a firm might try to maximize the rate of return on capital subject to the constraint that they maintain a 20% market share.

• Other Factors of Production

  • There are three factors of production that are required to produce economic output: land, labor, and capital.
  • Labor:which includes all human effort used in production as well as the necessary technical and marketing expertise; and
  • Capital: which are the human-made goods used in the production of other goods, such as machinery and buildings .
  • In accounting and other disciplines, the phrase "capital" can also refer to cash that have been invested in a business.
  • The classical economists also employed the word "capital" in reference to money.

• Clearing the Market at Equilibrium Price and Quantity

  • When a market achieves perfect equilibrium there is no excess supply or demand, which theoretically results in a market clearing.
  • Say's Law hinges on the concept that capital loses value over time, or that money is essentially perishable.
  • When you invest or owe money, that capital accrues interest due to the fact that there is an opportunity cost in not investing that money elsewhere.
  • While this concept of market clearing resonates well in theory, the actual execution of markets is very rarely perfect.
  • Another classic criticism of market clearing is the way in which the labor market functions.

• Role in Providing a Market for Loanable Funds

  • The loanable funds market is a conceptual market where savers (suppliers) and borrowers (demanders) are able to establish a market clearing.
  • In economics, the loanable funds market is a conceptual market where savers (suppliers) and borrowers (demanders) are able to establish a market clearing quantity and price (interest rate).
  • In the loanable funds market, market clearing is defined as the interest rate/loanable funds quantity where savings equal investment (the amount of capital needed for property, plant, and equipment based investments) .
  • Loanable funds are often used to invest in new capital goods.
  • Therefore, the demand and supply of capital is usually discussed in terms of the demand and supply of loanable funds.

• Conditions of Equilibrium

  • Equilibrium in the labor market requires that the marginal revenue product of labor is equal to the wage rate, and that MPL/PL=MPK/PK.
  • The labor market differs somewhat from the market for goods and services because labor demand is a derived demand; labor is not desired for its own sake but rather because it aids in producing output.
  • Firms are price-takers in the goods market (cannot affect the price of output) as well as in the labor market (cannot affect the wage rate);
  • The point at which the MRPL equals the prevailing wage rate is the labor market equilibrium.
  • The cost of that action will be the output lost from cutting back on capital, which is the ratio of the marginal product of capital (MPK) to the price of capital (the rental rate, PK).

• Cost of capital

  • The cost of capital is the rate companies must pay to finance a project.
  • The cost of capital refers to the cost of the money used to pay for the capital.
  • In order for an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital.
  • This determines the "market" cost of equity.
  • One way of combining the cost of debt and equity to generate a single cost of capital number is through the weighted-average cost of capital (WACC).