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Capital markets primarily feature two types of securities – equity securities and debt securities. Both are forms of investments that provide investors with different returns and risks and provide users with capital with different obligations.

1. Equity Securities

Equity securities are traded on the stock market and are essentially ownership shares of a business or venture. When you own equity securities of a company, you essentially own a portion of that company and are entitled to any future earnings that the company brings in.

However, the money that you invest in equity securities is not required to be paid back by the business.

2. Debt Securities

Debt securities are traded on the bond market and are IOUs that can come in the form of bonds or notes. They essentially represent the borrowing of money that will be paid back at a later date with interest.

Interest is the required compensation that entices lenders to lend their money. The borrowers will take the money today, use it to finance their operations, and pay back the money in addition to a prescribed rate of interest at a later date.

3. Other Capital Markets/Capital Market Products

There are many different capital market products, some of which we referred to earlier:

Each of the above is traded in different markets and exchanges. Some of these are centralized, such as equity securities, foreign exchange, and some derivative securities. Others are decentralized and traded between market participants without an exchange or a broker, such as debt securities, commodities, and other derivatives.

Derivatives can get complicated, but they represent a huge market as well. They are versatile and can be structured and created to tailor features such as risk and return for other securities.

Capital markets are a staple of the global economy. They provide an arena in which investors looking to invest saved funds in return for compensation. They can funnel their capital towards people and businesses who need the capital now in order to expand. This is the crux of how a capitalist, market-based economy grows.

4. Fixed-Income Security

Fixed-Income securities are debt instruments that pay a fixed amount of interest—in the form of coupon payments—to investors. The interest payments are typically made semiannually while the principal invested returns to the investor at maturity. Bonds are the most common form of fixed-income securities. Companies raise capital by issuing fixed-income products to investors. Provides a return in the form of fixed periodic interest payments and the eventual return of principal at maturity. Fixed-Income security provides investors with a stream of fixed periodic interest payments and the eventual return of principal upon its maturity. Bonds are the most common type of fixed-income security, but others include CDs, money markets, and preferred shares.

A bond is an investment product that is issued by corporations and governments to raise funds to finance projects and fund operations. Bonds are mostly comprised of corporate bonds and government bonds.

Types of Fixed-Income Securities

Although there are many types of fixed-income securities, below we’ve outlined a few of the most popular in addition to corporate bonds.

  1. Treasury notes (T-notes) are issued by the U.S. Treasury and are intermediate-term bonds that mature in two, three, five, or 10 years.
  2. Treasury is the Treasury bond (T-bond) which matures in 30 years.
  3. Short-term fixed-income securities include Treasury bills. The T-bill matures within one year from issuance and doesn’t pay interest. Instead, investors can buy the security at a lower price than its face value, or a discount. When the bill matures, investors are paid the face value amount.
  4. A municipal bond is a government bond issued by states, cities, and counties to fund capital projects, such as building roads, schools, and hospitals.
  5. A bank issues a certificate of deposit (CD). In return for depositing money with the bank for a predetermined period, the bank pays interest to the account holder. CDs have maturities of less than five years and typically pay lower rates than bonds, but higher rates than traditional savings accounts.
  6. Companies issue preferred stocks that provide investors with a fixed dividend, set as a dollar amount or percentage of share value on a predetermined schedule. Interest rates and inflation influence the price of preferred shares, and these shares have higher yields than most bonds due to their longer duration.
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