Welcome to the world of capital markets – where money explores different parts. If you are confused, do not worry! We are here to make it easy.
Imagine the different types of capital market like a big menu with various options for making your money grow. We will use different bases to sort them out, it is all about putting money into straightforward groups. Join us for a quick and simple tour into the types of capital markets. Ready for an exciting money adventure? Let’s dive in!
Nature of Claims: Debt Market and Equity Market
Nature of claim is like understanding what you own or owe. It is about figuring out if you have a share in something (equity) or if you have lent money and expect it back (debt). So, in the capital market, when we talk about the nature of claim, we are looking at whether you are claiming ownership in a company (equity) or claiming repayment of money you lent (debt). It is like knowing if you are a co-owner or a lender in the financial world.
The debt market is like making a deal to lend or borrow something in the future. In simple terms, it’s when you agree on a loan today, but the actual exchange (repaying or getting back the money) happens later. This deal comes with a “maturity date,” which is like a due date for the repayment – when you expect your money back.
Now, imagine you lend money to a friend with the agreement that they’ll pay you back next month with a little extra as a thank-you (interest rate). The deal is set now, the maturity date is next month, and the exchange (getting your money back with interest) happens in the future. That is the debt market – making an arrangement today for a financial exchange that takes place later, with a specific due date and a little extra (interest) as a bonus for lending the money. It is like being the lender, patiently waiting for your friend to return the borrowed money with a small thank-you gift.
The equity market is like making a deal to share ownership in something. In simple terms, it is when you agree to be a part-owner of a company today, and your benefits (like profits) come later.
Imagine you and your friends decide to start a small business together. You contribute money, and in return, you get a share of the business (equity). As the business grows, you may receive a portion of the profits. This is similar to the equity market – making an arrangement today to be a co-owner of a company, and your rewards come as the company succeeds.
It is like being a co-founder of a business, where your investment today means you own a piece of the business, and as it does well, you share in its success.
Seasoning of Claims: Primary Market and Secondary Market
Seasoning of claims is like letting something mature or develop over time. It is about the process of making a claim or investment more experienced or “seasoned.” So, in the capital markets, when we talk about seasoning of claim, we are looking at how an investment or ownership evolves – whether it is in the early stages (primary market) or has been around for a while and can be bought and sold by others (secondary market). It is like deciding if your investment is still fresh and new or if it has been around the block a few times.
Primary markets are like being there at the birth of something new. It is when companies first offer their stocks or bonds to the public. Picture this: You are at a local Ethiopian handicrafts fair where artists are showcasing their brand-new creations for the first time. Similarly, in primary markets, companies introduce their “creations” (stocks or bonds) to investors for the first time. It’s like being part of the exciting beginning, where you can get something fresh and directly support the creators.
Secondary markets are like the marketplace for things that have been around for a while. It is where people buy and sell items that are no longer brand-new. Imagine it is like a thrift shop where people buy and sell second-hand clothes. After wearing a piece of clothing for some time, you might decide to sell or trade it with someone else. Similarly, in secondary markets, stocks or bonds that were initially sold in the primary market are now available for others to buy and sell. It is a marketplace where ownership of items shifts from one person to another.
Organizational Structure: Exchange Markets and Over-the-Counter Market
Organizational structure is like how a group of people or things is arranged and organized. In simple words, it is how everything is set up and who is in charge. So, in capital markets, when we talk about organizational structure, we mean how the buying and selling of financial stuff (like stocks or bonds) is organized – whether it is done in one central place (exchange) or by individual dealers in different locations (over-the-counter). It is like deciding if the trading happens in a big, organized store or through individual sellers in different stalls.
Exchange Market is where people who want to buy or sell things like stocks or commodities meet in one central place.
The exchange market is like the Abrehot library checkout system. In this setup, buyers and sellers gather at a central location (the library) where they can easily see available books (financial instruments). These books have standardized borrowing terms (prices) and are organized in specific sections (sectors). Traders can efficiently browse, select, and exchange books within the structured environment.
Over-the-counter market is where dealers in different locations have securities to buy and sell. They do it “over the counter,” meaning they sell directly to anyone who comes to them and agrees with their prices. This is like a competitive market where dealers are in contact through computers.
The over-the-counter market is comparable to an informal book swap among visitors in the Abrehot library. Instead of a central location, individuals (dealers) are scattered throughout the library, each with their collection of books (securities). Buyers can approach any individual, negotiate terms, and trade books directly. The OTC market is more flexible and decentralized, similar to the informal exchange of books between library visitors.
Delivery: Cash/Spot Market and Derivative Market
Delivery in the capital market is like when you buy or sell something, and it is time to exchange what you agreed on. It is when you either receive what you bought or hand over what you sold. For example, imagine that you agree to buy a basket of injera. The delivery is when you actually get that basket in your hands or give the money to the seller. In the capital market, it works similarly – it is the step where you make sure everyone in the trade gets what they agreed upon, whether it is right away (spot or cash market) or in the future (derivative market). It is the final part of the deal, ensuring everything is exchanged as planned.
The spot or cash market is like buying and getting something right away, no waiting. In simpler words, it is when you do a trade, and boom, you immediately get what you bought.
Think of it like buying coffee in Merkato. You choose your coffee beans, pay the seller, and right there, you get the coffee in your hands. That is spot or cash market – quick, direct, and no waiting. It is like making an instant trade and enjoying your coffee immediately.
The derivative market is a bit like making a plan to trade something in the future. In simple terms, it’s when you agree on a deal today, but the actual exchange happens later.
For example, imagine you promise to buy honey from a local beekeeper in Ethiopia next month at a fixed price. The deal is set now, but the exchange (getting the honey and paying) happens in the future. That is the derivative market – making an arrangement today for a trade that takes place later. It is like agreeing on honey now and waiting for the sweetness to come next month.
Region: Domestic Market and International Market
Region means the area or place we are talking about. It is like saying where something happens. So, when we talk about the region in the capital market – whether it is domestic or international – we are figuring out if we are talking about trading and investing within our own country (domestic) or dealing with other countries (international). It is like deciding if the market action is happening close to home or across borders.
Domestic markets are like doing business close to home. It is when you trade or invest within your own country. Picture yourself buying fresh vegetables from a grocery nearby. You pick what you need, pay the seller, and use the veggies right there. Domestic markets work the same way – you trade stocks, bonds, or other financial stuff within your own country, and everything happens nearby without crossing borders.
International markets are like trading worldwide. It is when you do business that goes beyond your own country. Think of it as buying and selling goods with people from different parts of the world. For instance, you might exchange unique handmade crafts with artisans from various countries. That is how international markets work – trading stocks, bonds, or other financial things with people from different nations, like making deals that stretch beyond your local area. It is about broadening your business to include the whole world.
In conclusion, understanding capital markets does not have to be hard. This article has simplified the complexities, organizing the options in a way that is easy to understand. Now, you are ready to explore and invest confidently.
Happy investing!
