Contents
Concept of Capital Market
A capital market or the security market is a market where the savings of an investor are channelized and made available for the development and heavy projects of the company and governments. It is a market that provides funds to businesses to expand, grow, start new projects, or continue the existing ones. It serves as a bridge between the persons who have a considerable amount of capital to invest in and the ones who need the money for their businesses.
The capital market is divided into two segments. The first segment deals with the security which is issued in the market for the first time and is known as the primary market. The second segment deals with security which is already existing in the market and is known as the secondary market.
These two markets deal in various types of instruments which are of different natures and fulfill different requirements of the businesses. Let us explore the different types of instruments used in the market
Instruments of Capital Market
Capital market instruments are those instruments that ensure a smooth and continuous flow of funds in an economy. These instruments form a binding relationship between the investors and the company. These instruments provide the investor with the right kind of assets to invest in. At the same time, it provides the company with the necessary and required funds.
There are various types of instruments used in a capital market. Some of them are discussed below.
Stocks
Stocks or equity shares are the most common instrument issued in the capital market by the company to raise funds. It represents the investors’ ownership and voting rights in the company. The investors who invest in stock are known as the shareholder of the company and become a partner in the company’s profit and losses.
Preference share
Preference shares are the same as equity shares but they get a preference in case of dividend payments or liquidation payouts of a company. In the case of preference shares also the investors become the shareholder but they do not enjoy any voting rights in the company. The shares are of three types:
- Redeemable shares that can be redeemed before the liquidation of a company
- Irredeemable shares that cannot be redeemed before the liquidation of a company
- Convertible shares can be converted into equity shares after a specific time.
Debt
Debt or debentures is a form of borrowing that represents the company’s obligation to pay the principal amount along with fixed interest charges after a particular time. They are issued by the company and government to invest in projects which require a huge investment. This instrument is characterized by unlimited tenure and interest obligations that are made either annually, semi-annually, quarterly, or monthly. Debt is more secure than equity shares but is more prone to risk as a default in payment may lead to a financial crisis in the company.
Derivative
Derivatives are that capital market instruments that drive their value from an underlying asset such as bonds stock metals commodities currencies etc. This instrument is the least secured instrument where there is the highest risk and speculation.
Exchange-traded funds
Exchange-traded funds are a pool of financial resources gathered or collected from different investors to invest in several capital market instruments like share debt bond derivatives, etc. ETF is a great option for those investors who have unlimited knowledge about the stock market and how to trade on them. These are secured and registered with the Securities and Exchange Board of India.
Foreign exchange instruments
Foreign exchange instruments are those which are used to trade in the foreign market. It used foreign currency, foreign agreements, and derivatives based on the law of the foreign market.
