What is the capital market?
The capital market is the market for long-term money, usually for more than a year. A company wants to build a new factory, or the government wants to build a bridge; that needs money for many years. They raise it by selling shares or bonds, and investors buy them hoping for profit or interest.
Buying a share makes you a part-owner of the company; you may get dividends and a rising share price if it does well, and you carry the risk of losses. Buying a bond means lending to a company or the government; you are due fixed interest and your principal back at maturity. Either way, money flows from savers straight to the users of money, without a bank in the middle.
Say a garment factory in Chattogram wants to add a new production line. A bank loan would mean fixed instalments on a set schedule. Instead, the company lists on the stock exchange and sells shares in an IPO. Thousands of people in Dhaka, Khulna and Sylhet each buy a few shares. The company gets long-term money, and investors get a chance to share in its profits, along with the risk. This is only an illustrative example.
Why it matters to an investor
- Shares, mutual funds, corporate bonds, treasury bonds, sukuk: all are capital-market products. Knowing how the market works makes each of them easier to understand.
- To understand risk and return: long-term money usually offers higher potential returns, but prices also swing more.
- To know when a company actually gets money: in an IPO, the money goes to the company; in later trading on the exchange, it passes from one investor to another.
- To know where to complain: the capital market’s regulator is BSEC, not Bangladesh Bank.
Primary and secondary markets
- Primary market: where new shares or bonds are sold for the first time, such as in an IPO or a government bond auction. The money goes straight to the company or the government.
- Secondary market: trading of already-issued shares and bonds between investors, mainly on stock exchanges. The company gets no new money, but investors are willing to buy in the first place because they know they can sell later.
Who does what in Bangladesh
The country has two stock exchanges: the Dhaka Stock Exchange (DSE), whose roots go back to the East Pakistan Stock Exchange Association formed in 1954, and the Chittagong Stock Exchange (CSE), set up in 1995. The whole market is regulated by the Bangladesh Securities and Exchange Commission (BSEC), set up in 1993 under the BSEC Act. Central Depository Bangladesh Limited (CDBL), established in 2000, holds shares electronically; that is why you need a BO (beneficial owner) account to trade shares.
Bangladesh’s financial system is mainly bank-based. According to the CFA Institute Research Foundation, banking-sector assets were about 64% of GDP in 2019, while in June 2020 the corporate bond market was only around 0.01% of GDP, against about 7.9% for government bonds. In other words, companies still rely mostly on bank loans even for long-term money.
Money market versus capital market
- Term: the money market is one year or less; the capital market is longer than a year, and shares have no maturity at all.
- Purpose: the money market meets day-to-day cash needs; the capital market funds factories, infrastructure and business growth.
- Risk: capital-market prices usually swing much more, especially share prices.
Worked example
- Say a company sells 2 crore new shares at Tk 10 each in an IPO. The company receives Tk 20 crore (before costs).
- After listing, the share price on DSE rises to Tk 15. Karim sells his 1,000 shares to Rahima for Tk 15,000.
- That Tk 15,000 passes from Rahima to Karim (less brokerage commission). The company receives no new money.
Result: the company gets money only in the primary market. Later rises and falls in the share price are mainly gains and losses between investors. The numbers are only an example.
Common mistakes
- Thinking the capital market means only the stock market. Bonds, sukuk and mutual funds are part of it too.
- Thinking a company directly receives money when its share price rises. Secondary-market trades are between investors.
- Putting money you will need soon, such as next month’s rent or your emergency fund, into a long-term market.
- Assuming “listed” or “BSEC-approved” means guaranteed profit. Approval means meeting the rules, not a promise of returns.
The capital market is the market for long-term money: companies raise funds in the IPO, and in later trading investors pass risk and return among themselves.