The capital market is composed of the bond market, in which debt instruments are issued and traded, and the stock market, in which shares of ownership in companies are issued and traded. In the United States and worldwide, the bond market is much larger than its stock market counterpart.
In 2010, global stock market capitalization stood at $54 trillion, according to the McKinsey Global Institute’s report “Mapping Global Capital Markets 2011.” The outstanding global debt including public debt securities, financial institution bonds and nonfinancial reached $93 trillion -- almost twice the capitalization of the equity market.
The size of the U.S. bond market is just under $37 trillion, finance professor Torben Anderson at the Kellogg School of Management says in “Volatile Assets” in July 2012. In comparison, the market capitalization of the U.S. stock market is about $21 trillion.
The bond market is larger than the stock market for various reasons. Whereas only corporations issue stocks, governments and corporations both issue fixed income securities. The U.S. Treasury is the largest issuer of bonds worldwide. Because U.S, Treasury bonds are backed by the full faith and credit of the government, investors perceive them as risk-free and highly liquid.
Even though the stock market was enjoying record highs in the two decades before the 2008 financial crisis, bonds accounted for 75 percent of corporate financing, according to Mark Skousen’s “Economic Logic.” Stocks are a cheaper source of capital for corporations because they don’t require fixed-interest payments. However, most investors are older and risk-averse, preferring the regular income of bonds.
In the 2000s, the U.S. bond market doubled in size and grew at a faster rate than the economy. The sharp growth was largely due to financial innovation, according to Anthony Crescenzi’s 2010 “The Strategic Bond Investor.” For example, the investing community saw the introduction of asset-backed securities, which repackaged mortgages, student loans, credit card loans and automobile loans. The globalization of the capital markets has also resulted in lower trade barriers and new technologies that speed cross-border capital flows.
In the wake of the 2008 financial crisis, the composition of bond market growth has altered. Although the private sector has deleveraged, the U.S. government has dramatically boosted its borrowing.
Despite the larger size of the bond market, the public and news media focus on the ups and downs of the stock market. Whereas bond investors hang onto their portfolios for the long term, equity investors trade in and out of stocks more frequently. Mutual fund managers and brokerages spend more resources trying to persuade investors to buy stocks.
The stock market indexes are viewed as leading indicators of corporations’ future plans as well as expectations of economic growth. The vitality of the stock market is also a reflection of the public’s faith in a system based on free enterprise.