Capital Market: Meaning, Types, and Importance

Capital market is composed of those who long term funds and those who supply funds. It is concerned with long term financial requirements not only for the private sector industries but also for government and semi-government bodies as well.

The market facilitates dealings in financial assets (or claims) that have a long or indefinite period of maturity. It consists of channels through which the funds supplied are converted into investments.

Examples of capital market :

  2. Debentures
  3. Bonds
  4. Long term borrowing

Features Of Capital Market :

The main features of these markets are as follows :

A) Dealing in Securities: This market deals in long term marketable securities and non-marketable securities.

Marketable securities include shares and debentures issued by companies, bonds issued by the government, mutual funs instruments, etc. Non-marketable securities include term deposits with banks and companies, loans and advances of banks and financial institutions to industrial organization, etc.

B) Segments: This includes both primary and secondary markets. Primary markets are meant for the issue of fresh capital and secondary markets facilitate buying and selling of second-hand securities.

C) Investors: These markets include both individual inventors and institutional investors.

D) Intermediaries: This markets function through intermediaries, such as underwriters, bankers, stockbrokers, etc.

E) The flow of capital: This market facilitates the flow of capital from those who supply the capital to those who demand capital.

Importance Of Capital Market:

The importance of these markets can be justified for the following grounds :

A) Availability of funds: This market helps long term funds from domestic and foreign investors.

B) Mobilization of Savings: This market mobilizes the idle savings of individuals and institutions to productive channels.

C) Capitals formation: These markets stimulate savings and investment in the economy and improve the utilization of financial resources. In this way, it leads to capital formation.

D) Industrial Growth: This market facilitates industrial growth in the economy by making capital available for investment. It generates long term funds, which are essential for the establishment and operation of industries.

E) Attracting foreign capitals: This market helps in attracting foreign investment. The Indian capital markets provide the channels through which foreign investors and non-resident Indians can invest their funds in the securities of Indian companies.

F) Liquidity: This market enables investors to sell their securities through the Stock exchange. In other words, it ensures liquidity.

G) A balance between demand and supply: This market brings about a balance between demand and supply of capital. It serves as a link between those who demand capital and those who supply capital.

Classification/Types of Capital Market :

This market has two segments, as shown below :

  1. Organised Capital Market
  2. Unorganised Capital market

A. Organised Capital market: It consists of the corporate sector, government and semi-government bodies. It is regulated by the Securities and exchange board of India (SEBI), The Reserve Bank of India and the central government. The organized capital market can further be divided into the following two segments :

  1. Primary market
  2. Secondary market

1. Primary Capital Market :

The primary market is known as the New issue market (NIM). It is the market where new securities (share, bonds, debentures) are sold or purchased for the first time. The new issue market should be distinguished from the secondary market.

Features Of Primary Market are as follows:

  1. The primary market is concerned with long term capital.
  2. Securities are selling for the first time in this market.
  3. Securities are issued directly to investors.
  4. Securities certificate are issued to investors.
  5. Securities are issued to raise funds for setting a new business.
  6. It doesn’t include long term loans from financial institutions.

Methods of Issuing Securities: 

The mechanism of the new issue market involves various methods of raising capital.

2. Secondary Capital Market :

Secondary market deals in existing securities. It deals in existing securities like shares, debentures, bonds, etc. which have already been issued for the first time.

This is why exiting securities are called ” Second Hand” securities. The securities available with the investors can be sold through brokers in the stock exchange.

Features of Secondary Market are Stated below :

  1. Secondary market deals in previously issued securities.
  2. This market is not the place of main of the securities.
  3. Securities are not issued directly by the companies to the investors.
  4. The intending buyer and seller can buy and sell securities through brokers of a stock exchange.
  5. The secondary market is also known as the Stock market.

Difference between Primary Market And Secondary Market :

Primary market and Secondary market differ in the following respects :

A) Nature: The primary market is concerned with the issue of new securities by the companies to the investors.

B) Capital Formation: Primary market promotes capital formation directly, whereas secondary market promotes capital formation indirectly.

C) Determination of price: The prices of securities in the primary market are determined by the management of the issuing company. But the prices of securities in the secondary market are determined by the forces of demand and supply.

D) The number of dealings: New securities are offered for sale only once in the primary market. On the other hand, Existing securities can be sold and purchased again and again.

B. Unorganised Capital Market :

It consists of indigenous bankers, money lenders, private leasing and finance company, investment companies, chit funds. Unorganised capital market is not subject to the direct control of the RBI or SEBI.

Frequently Questions And Answers :

1. How did capital markets work?

Ans: This market works with long term.

2. Different types of capital markets?

Ans: There are two types of capital markets: The organised sector And the Unorganised sector.

3. Example of Capital markets?

Ans: Example of capital markets :

  2. Debentures
  3. Bonds
  4. Long term borrowing

4. What are the advantages of Capital markets?

Ans: Capital markets helps long term funds from domestic and foreign investors.

5. What are Capital markets in Simple words?

Ans: In simple words, Capital markets are composed of those who long term funds and those who supply funds

6. Why do you need capital markets?

Ans: Capital market helps a businessman to buy and sell stocks and bonds, and also helps to raise capital.

7. What are the types of the organised sector?

Ans: Primary Market and secondary market.

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