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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 organised financial market where saving and investment are channelled 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 trading of long term financial securities for raising and investing of 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. Features of Capital Market are as follows.
Features or Objective of Capital Market
Deals in Long term Investment
Capital market is a market for trading of long term securities. It provides long term investment avenues to the investors. Borrowers can raise fund for a long period from the capital market. Here borrowing and lending is for a period which is more than one year. Long term financial instruments like shares, bonds, and debentures are traded in the capital market.
Bring together borrowers and lender
It acts as mediators between the borrowers and lenders of money. It links the person having surplus funds with the one who is the deficit of money. Capital market directs people having savings to different productive investment avenues. This help in providing long term funds to borrowers by attracting large investments from peoples.
Regulated by government
Capital market works as per the regulation of government. There is a body named SEBI set up by the government who looks and regulate the functioning of the capital market. SEBI (Securities Exchange Board of India) controls and monitors the functioning of capital markets to protect the interest of its investors. It aims at avoiding any speculative and malpractices in the capital market.
Utilises Intermediaries
There are several intermediaries who are connected with the capital market to facilitate its functioning. Intermediaries are termed as important work organs of capital market. Different intermediaries involved with capital market are Broker, sub-brokers, underwriters, collection bankers etc. These intermediaries interact with customers and communicate all important information between the capital market and customers.
Determines capital formation rate
Capital market reflect the rate of capital growth in the economy. Capital market circulates the funds among different sectors of the economy. It provides the huge fund required for large infrastructural developments in the economy by attracting investments from the public. Different business corporations depend on capital markets for raising funds for their processes. This way it accelerates the rate of capital formation in the economy.
Provides Liquidity
Capital market is a highly liquid market as the instruments traded in the capital market are easily convertible into cash. Investors can whenever they require can converts their investments into cash by selling their instruments over the market. It provides an all-time market for the peoples looking for investments and one looking for borrowing money.
Variety of Instruments
There are varieties of instruments which are traded in the Capital market. There is a lot of options available for both investors and borrowers hence providing greater flexibility to both. A person according to his risk-taking ability and convenience can take any of the avenues available for investment and borrowing. High leveraged company can go for equity option for raising funds. Whereas low leveraged company can go for debenture and bond option.
Includes primary market and secondary market
Capital market includes two markets within it: Primary market and secondary market. Primary market is a market concerned with the issue of new securities. Here securities are issued for the first time. Secondary market is a market for old and existing securities. Securities already traded in the primary market are issued in the secondary market.