Equity and bond markets collectively are known as the capital markets. The capital markets are mechanisms for raising capital, transforming savings productively into investments, so that companies can produce goods and services for the economy.

A Dictionary of Finance always aims to find out what a particular market is and how it works. This week we get the low-down on how capital markets work, in a discussion that lays out exactly how technology has changed the traditional image of a bunch of traders yelling at each other on the floor of a stock exchange.

Sandeep Dhawan came on A Dictionary of Finance podcast to talk about capital markets and how they work. He took us back to seventeenth-century Amsterdam to early stock exchanges and then right up to date with his explanation of “virtual exchanges,” where all the business is transacted over computer servers.

“There is a good argument to be made that an open pit or open outcry system with a whole bunch of loud and aggressive people yelling at each other is such a visceral way of trading that it gives people a better idea of what’s going on in markets than a screen flashing in front of you,” says Sandeep, who works in the Capital Markets Department of the European Investment Bank.

“But that argument is not made very much anymore. Markets now are global. Demand is global. These things needed to spread out to enable transactions to happen all across the globe, rather than in one particular location.”

Sandeep explains how equity and bond markets operate in one of our broader episodes on the podcast.

He also tells us the difference between capital markets and money markets (mainly it’s to do with money markets representing financial instruments that help finance liquidity for periods shorter than a year, while capital markets offer longer-term instruments.)

He also gives us details of:

• Over-the-counter trading (for bespoke deals between private counterparts) compared to open outcry (the aggressive guys shouting in the trading pit)
• The phrase “too big to fail,” which is usually used for banks and insurance companies, but is now sometimes applied to hedge funds
• How capital markets are regulated, laying out the process from securities law and its enforcement by securities regulators, as well as the oversight provided by stock exchanges.

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