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What Is Capital Market Equilibrium?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 19 September 2014
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Capital markets are places where individuals and businesses buy and sell various investment securities. Like any market in a free market economy, capital market equilibrium represents a point at where supply and demand meet for investments. There are two equilibrium points in this market: one for an individual investment and one for the aggregate of all investments bought and sold in this market. Capital market equilibrium may be difficult to reach as the price for various investments can change quickly for a host of reasons. In some cases, buyers may have more power in a capital market to influence the price of investments.

On the supply side, businesses and other organizations issue investments, such as equity, bonds, and other items, for investors to purchase. Capital markets include large numbers of businesses from a variety of industries. The different types of investments from these industries can result in several different points that lead to capital market equilibrium. For example, there may be one equilibrium point for the energy sector, another for the retail industry, and yet another for the automotive industry. Reaching equilibrium in each of these will usually have different price points for the investments traded in each one.

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Buyers are often free to select which investments they desire most in a free market economy that boasts a large capital market. In order to attain capital market equilibrium, companies must offer investments that are both attractive in cost and financially rewarding. This initially can be difficult as many different industries compete against each other, and some industries or sectors are much more risky than others. Additionally, each company can usually dictate its own terms for debt securities, such as bonds and similar instruments. Therefore, it is difficult to set one capital market equilibrium point for all companies that engage in this activity.

In short, equilibrium points in any economic market indicate that there is just enough supply to meet the entire demand for an item. Individual companies may be able to reach this point with stocks easier than an entire capital market. Companies can issue a certain number of stocks and then wait for feedback from investors, many of whom comment, rate, and buy or sell the investment. If too much stock is in the market, the price per individual stock is low, depressed by oversupply. Companies may then purchase some of the stock back from investors, lowering the overall supply in the market and increasing the price per unit of the stock.

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