What are the different types of capital market products?

Mortgages are securities backed by real estate, which makes them generally considered less risky than debentures.

The term capital market refers to the network of procedures and institutions that facilitate transactions in long-term financial products. They are usually sold by a company or government to investors, or traded between investors. There are several different types of capital market products, various types of bonds and stocks, sometimes called equity securities. In the US, companies and investors can also store funds in US Treasury bonds and federal agency bonds.

Inventories are some of the most popular products on the capital market.

Two important elements of the capital market are organized stock exchanges and over-the-counter markets. Organized stock exchanges are physical locations where capital market products are traded. Any type of trading arrangement that does not take place on an organized stock exchange takes place on over-the-counter markets. Financial managers have a variety of payment arrangement options when buying and selling securities in these markets, including checks, automatic transfers, wire transfers and cash accounts.

Inventories are some of the most popular products on the capital market. There are two basic types of shares, common and preferred. Ordinary shares are shares owned by a company sold on the capital market to investors. In exchange for the investment, the shares pay dividends to shareholders that vary in value depending on the company’s overall financial health. Stocks likely to pay higher dividends trade at higher prices.

Speculation about a company’s financial health alters its stock price, which leads to the highs and lows common to many modern capital markets. Preferred stock cannot be publicly sold and, unlike common stock, preferred stock has fixed dividend payout amounts that do not vary depending on the company’s position. Failure to pay dividends due does not force the common or preferred shares into bankruptcy.

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Compared to stocks, bonds can be much less volatile capital market products. Bonds are long-term promissory notes held by creditors. Bonds often commit to paying interest on the amount borrowed and, typically, an eventual repayment of the principal debt. Some types of bonds include debentures, mortgage bonds and junk bonds. Debenture is a general term for unsecured securities.

When a company issues a second round of bonds before paying off the first, these debts are called subordinated debentures. These are riskier than regular bonds because the issuing company has more debt, but interest payments are generally higher. Mortgages are securities backed by real estate, which makes them generally considered less risky than debentures. Junk bonds are debt products that earn high interest but have a low probability of full repayment of the principal debt.

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