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Meaning of Capital Market
Capital market is a market for borrowing and lending of long-term finance that is for a period of more than one year. It is an organized financial market where saving and investment are channeled between the one who has sufficient money and one who is in need of money. Capital Market basically serves as the link between the savers and investors. This market involves the trading of long term financial securities for raising and investing in long term finance. The main types of instruments traded in capital markets are Debentures, Shares, Government securities, and Bonds.
There is a high degree of risk involved in the capital market as it involves long term investment. Capital market is of types: Primary market and secondary market. Primary market is known as the New issue Market. It is a market for trading of new securities means which are traded for the first time. Methods like Right issue, Offer through prospectus and Initial public offer are used here.
Whereas Secondary market is a market for trading of old and existing securities. Secondary market is known as the stock market or stock exchange. The securities which were previously traded in the primary market are traded in the secondary market. Investors bring and sell securities in the secondary market. characteristics of capital market are as follows.
Characteristics of Capital Market
Long term Investment
Capital market is a market for trading of long term securities. Long term investment avenues are provided by it to the investors. Borrowers may raise fund for a long period in the capital market. Here lending and borrowing is for a period that is more than one year. Long term financial instruments such as stocks, bonds, and debentures are traded in the capital market.
Link between borrowers and lender
Capital market is a link between borrower and Lander. It links the person having the surplus Fund with the one who has a shortage of fund. The capital market provides different investment avenues in which the person can invest. This help in providing borrowers with long term funds by bringing large investments from peoples.
Capital Formation
Capital market’s actions determine the rate of capital formation in a market. Capital market offers attractive opportunities to people who have surplus funds so that they invest more and more in the capital market and are invited to save more for profitable opportunities. This way it accelerates the rate of capital formation in the economy.
Accurate Timely Information
Capital market provides accurate information to the investors. The information must be provided timely. So that investor can make the decision of investment Whether to invest in a company or not.
Includes Primary Market and Secondary Market
Capital market of two types of primary market and secondary market. The primary market is concerned with the issue of new securities. Here securities are issued for the first time. Secondary market is concerned with the existing securities. Securities already traded is traded secondary market.
Government Regulations
The capital market works but under the advice of government policies. These markets operate within the framework of regulations and government rules, for example, the stock exchange works under the regulations of SEBI(Securities Exchange Board of India) which is a government body.
Provides Liquidity
As the instruments may be convertible into cash in the capital market. As per the need, of the investor can convert their investment into the liquid form. This is how capital markets provide liquidity.
Variety of Instruments
Capital market has a variety of instrument. Some instruments are at high risk and some instruments are low risk. this instrument can be debentures, Equity shares preferential Shares. As per the risk-taking ability of an investor can choose Between in these instruments.