What Are Capital Markets?

By Matthew Frankel, CFP – Updated Oct 8, 2025 at 3:15 AM EST

Key Points

Capital markets facilitate raising capital and provide platforms for buying and selling investments.
They include stock, bond, and currency markets, distinguishing them from just asset trading spaces.
Understanding primary and secondary markets helps investors engage more effectively in capital markets.

The term "capital market" is often used to reference the stock market, but it actually has a much broader definition. In this article, we'll define capital markets, discuss the role they play in the financial system, and talk about the types of financial markets that are and are not included in this category.

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Stock Market Sectors

There are 11 different stock market sectors, according to the most commonly used classification system: the Global Industry Classification Standard (GICS).

Investing in Financial Stocks

When most people hear the term "financial sector," they think of banks. Although this is certainly the largest part of the financial sector, several other types of companies are included in the sector as well.

What to Invest In

Let's take a closer look at some of the most popular investment vehicles. They may not all be appropriate for you today, but over time, the best investments for your needs can change.

How to Invest in Mutual Funds

A mutual fund is a collection of investment assets packaged as a single investment. Mutual funds allow investors to pool their money to invest in a diverse portfolio of stocks, bonds, or other assets.

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Other types of markets

As we've seen, capital markets are places where investment capital is raised, usually through stocks or bonds, and where these instruments are traded between investors in a liquid and orderly manner. However, there are a few other terms that often get used interchangeably with the term capital markets, but they have different meanings.

Stock markets: A stock market is a type of capital market where equity shares of corporations are issued, exchanged, bought, and sold.
Money markets: Although money market funds are a form of debt, it is short-term in nature. The "capital markets" inclusion of bond and debt markets typically only means long-term debt, which refers to bonds and other debt securities with maturities of a year or longer. Short-term financing is facilitated in money markets -- usually to provide capital for a short-term purpose, such as to fund operations while waiting on customers to pay their accounts.
Financial markets: The broadest "market" term, financial markets refer to the capital markets, money markets, and more. Basically, anywhere money is raised or investments are traded can be classified as a financial market under the broad definition of the term.

Not to add confusion, but the exact definition of some of these terms can depend on the source. For example, many people use the term "financial markets" to include just money markets and capital markets, while others use it in a broader sense. Many experts consider capital markets to be the stock, bond, and foreign exchange markets, but there's some gray area there as well, especially when it comes to derivatives of the investments in these markets (such as options and futures exchanges). So it's best to know the general definition as well as the other types of markets.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

TMFMattFrankel

@MattFrankelCFP

The Motley Fool has a disclosure policy.

Examples of capital markets

As far as stock markets go, the New York Stock Exchange (NYSE), Nasdaq, London Stock Exchange (LSE), Shanghai Stock Exchange, and the Shenzhen Stock Exchange are some of the largest, but there are numerous other stock exchanges throughout the world. There's also the over-the-counter (OTC) market, which features thousands of companies that either don't want to list on a major stock exchange, or, for one reason or another, cannot qualify to do so.

There are also some bond markets that facilitate trading of bonds, such as the NYSE Bonds market. The U.S. Treasury's Treasury Direct is another example of a market, where the government sells debt securities such as Treasury bonds directly to the public.

Primary and secondary markets

Within the capital markets, there are two main types of transactions that take place.

1. Primary markets

Primary markets involve a company (or other entity) selling investment securities directly to investors, typically investment banks, hedge funds, and other institutional investors.

For example, when a company issues new shares in an initial public offering (IPO), that's an example of primary market trading. When a company decides to raise capital via a debt offering and sells bonds to institutional investors, that's a primary market situation. Companies hire investment banks to help issue new shares or bonds (a process known as underwriting), and, for this reason, the primary market is often referred to as the "new issue" market.

2. Secondary markets

On the other hand, the secondary market refers to stocks, bonds, or other securities being traded between investors. When you buy stock through your broker, it's an example of secondary market trading since your shares come from other investors, not the company itself. The NYSE is an example of a secondary market.

When it comes to stocks, bonds, options, and several other types of investments, there are regulatory agencies such as the Securities and Exchange Commission (SEC) that oversee trading activity. Their regulations apply to both primary and secondary market activity.

What Are Capital Markets?