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A capital market is What comes first when you here a term capital! Normally it refers to finance. To keep the economy rolling, finance is an important element because that lubricates the growth pattern of an economy.
Let’s have an example, you have a huge amount of liquid cash at your disposal; keeping them in your locker will not help the money multiply. Instead, you can invest such funds into the bank or financial institution, invest in various schemes, so in turn, this money will flow into the economy via financial markets. Saving not only generates funds for you but also for the economy as a whole.
Thus, capital markets play a vital role in the deployment of these savings/liquid cash for investment purposes.
Capital markets are a type of financial markets which acts as a channel in the flow of funds from the savers to the fund seekers. In normal term, Capital Market is the market which enables buyers and sellers to engage or trade-in financial securities like bonds, stocks, etc. Basically, the buying and selling transactions are undertaken by the participants such as individuals and various institutions.
The impulsive platform provided by capital market helps the Government or companies or organizations or institutions to raise funds for long-term purposes such as developing a new line of business, expansion of existing business, mergers, amalgamations, etc.
By comparing past of capital markets the presently capital market system is well equipped with electronically based trading system which provides an expansive platform, bringing together traders from different zones and countries.
The capital markets transfer money from people who have it to organizations who need it in order to be productive, they are critical to a smoothly functioning modern economy. They are also particularly important in that equity and debt securities are often seen as representative of the relative health of markets around the world.
Security market provides the platform for such financial instruments which are transferable by sale. They are basically divided into two components which are Primary Market and Secondary Market.
Primary market deals with trading of new issues of stock and securities. In this type of market shares, debentures and other securities are traded for the first time for collection of long-term capital such as starting a new project or modification of an old project. This market is basically concerned with new issues only. This market regulates the flow of funds from the investor to the borrower .i.e. industries and companies which directly helps in the capital formation of the company.
To understand better let’s have an example: Company ‘A’ Limited is in need of funds. It issues shares in the primary market. When the company issues shares for the first time, it is called Initial Public Offering (IPO). Any further issue of shares is known as Follow-on Public Offer (FPO).
Recommended Article: Advantages of Listing in Stock Market.
Secondary Market deals with trading of existing or previously issued securities. The Secondary market is basically operated through the medium of the stock exchange. The main purpose of the secondary market is to create liquidity. It provides a forum for buy-sell of securities. After the listing of securities in the stock exchange, the investor can trade in such securities in the secondary market.
For example: Trading on National Stock Exchange (NSE), Bombay Stock Exchange (BSE), Calcutta Stock Exchange (CSE), etc. refer as secondary market traders.
Investment in the capital market basically takes place through the Bond market and the Stock Market. Mainly the capital market is the financial pool in which different companies, as well as the government, can raise long-term funds. Both the Stock Market and the Bond Market are risky which differs specifically.
Capital market in India has grown considerably over the years and became crucial for the nation’s economic development. Various factors are responsible for the growth of market which is, the growth of stock exchange since it makes possible to list the shares to trade, then the growth of financial institutions, mutual fund growth, merchant banking growth, etc plays role in the growth of the capital market.
Often people create confusion between the capital markets and money markets, though the two are distinct and differ from each other in many aspects. Capital markets are exclusively used for medium-term and long-term investments of a year or more wherein Money market is limited to the trade of financial instruments with maturities not exceeding one year. The money markets deal with deposits, collateral loans, acceptances, and bills of exchange wherein capital markets deal with equity and debt securities.
The capital market gives a platform for infusing capital into the economy, trading of securities, raising long-term finance, etc. financial market plays an imperative role in keeping the economy rolling. Global integration the widening and intensifying of links between high-income and developing countries has accelerated over the years. Over the past few years, financial markets have become increasingly global. The Indian market has gained from foreign inflows through the investment of Foreign Institutional Investors (FIIs).
Also, Read: Capital Market & Investment Banking: Future Prospect.