Abstract
Capital markets have two important functions: primary market and secondary market. The primary market provides new capital. It is mostly considered as a source of finance for companies which want to raise capital in order to finance their development or acquisitions. The second function of capital markets is the secondary market. Existing shares are traded and shareholders can dispose of their holdings when they want.
The primary market is dependent on the efficiency of the secondary market. Indeed, if the secondary market is not effective enough, investors fear to fell "locked in", and do not invest during IPOs. Liquidity in the secondary market must be effective enough to enable investors to sell their holdings.
The main function of the secondary market is to price assets. In the efficient markets theory, capital markets reflect all the available information for the shareholders. In other words, capital markets are a mean of firm valuation. The stock price reflects the value of the company.
