Capital markets provided a platform to investors for trading the financial securities such as bonds, stocks etc. The traders can be both individuals and institutions. Capital market is an important part of financial market, as a corresponding concept to the money market. Capital market is more focus on long term financing activities, it always refer to the market that consists of more than one year financial activities, such as shares, bonds etc. Capital market provides an efficiency market mechanism to let the capital transfer to investor (i.e. enterprise or government, at the same time they are also the share issuer) from the saver (the securities holders). In the western developed countries, the transactions of capital markets are almost covers all the financial markets. From the macro point the capital market can be classified as saving market, stock market, long term credit market, insurance market, financing lease market, bond market, and other financial derivative market etc., the stock market and bond market is the core of the capital market. Capital market is a market structure; it is not an actual market, and it means all the people and institutions that trading in this market and their relationship.
There are four main functions of the capital market. The first function is financing and investing function, it means the capital market offer opportunities to raise funds to people who need funds. On the other hand, it also provides investees to the fund providers. All the financial products that trading in the capital market can be both financing tools or investing tools. Financing and investing are two basic function of capital market and they are inalienable, neglect any of them can lead serious defects of the market. The second function is pricing function; it refers to decide the price for the capital. Stock is the expression of the capital, which means the price of the stock is the price of capital that represented by the securities. Both the supply sides and demand sides in the capital market decide the pricing of the securities. The stock demanders and stock suppliers are competitive relations because of the process of the stock market. The result of this competitive relationship can generate high return investment and increase the demand of the market and also increase the price of the stock. So the stock market provides a rational pricing mechanism for capital. The third function is capital allocation function and it means to guide the flow of the capital thus realize the rational allocation function. There are powerful evaluate, optional and supervisory mechanism in the capital market and the main investors as a rational economic man are always has a clear profit motive. Thereby, it can push the capital flow to the high benefit sectors, and shows the resources optimization allocation function. The last function is property right, it means restrain the investors’ property rights and function of work as property rights trading intermediary. The function of property rights is derived function of capital market, it play a significant role in process of property reorganization for enterprises through transform the operational mechanism of enterprises, provide accommodation of funds to enterprises, spread the information of property rights trade and offer property rights agent services.
Capital market plays an important role to stimulate economic development and an important alternative source of long-term finance is provided by the capital market for long-term productive investments. The capital market provides infrastructure capital and equity capital to increase the socio-economic benefits, such as roads, energy, telecommunication, public transport etc. More investment opportunities are offered by the capital market that encourages people saving their money for investing, the domestic savings and investment ratios are increased that is essential for rapid industrialization. The most important thing is the capital market offers a lot of opportunities for business to trade their financial securities can increase both their own benefit and society benefits.
The traditional financial theory is main focus on the qualitative research and the modern capital market theory is focused on using the mathematical model and other analysis methods to process the quantitative and empirical analysis. It considered as a revolution compared with traditional financial theory. Normally, people think the modern capital market theory is beginning with 1952 that Markowitz proposed the investment combination theory. The modern capital market theory is derive from the analyzing the capital market. The more systematic capital analysis is beginning with 20s of 20 century. From the 20s to 40s, the capital market analysis basically controlled by two groups, which is fundamental analysis represented by Graham and Dodd and technical analysis represented by Magee. After the 50s, there are third group appear, which is the quantitative analysis. Actually, the quantitative analysis for the capital market can be retrospect to 1900. Louis Bachelier uses the statistic to analyze the yield rate in his article ‘The Theory of Speculation’. In the 50s, the quantitative analysis begins to dominate the main position of the capital market. In 1952, Markowitz pointed out the mean variance portfolio theory in his article ‘Portfolio Selection’, and creates the index of the measure utility and the degree of the risk depends on the research methods. It determine the basic principles of portfolio, which is the investors are always pursue the revenue maximization under the high risk and normal revenue under the minimize risk. The assets portfolio theory of the Markowitz was considered as the sign of the birth of the modern capital market theory.