Capital Market

By : Neha Dhyani

Updated : May 31, 2022, 12:30

A flourishing Capital Market is a vital necessity for a country. A good Capital Market serves to support commercial and industrial development. For an economy to function smoothly, long- and short-term credit is required. The Capital Market is the channel through which the long-term capital needs of a country are met.

The Capital Market helps ensure the free and stable flow of finance into the country's economic system. Let's look at some of the essential aspects of a Capital Market.

What Is a Capital Market?

A Capital Market is a financial market where savings are channelled into investment. This market serves as a bridge between those suppliers who have surplus capital that they want to invest or lend and those who require such capital for various projects. Such a market deals in long-term investments. The lock-in period of investment is more than one year.

The Capital Market is overseen by financial regulators, such as the Securities and Exchange Board of India (SEBI), the U.S. Securities and Exchange Commission (SEC), and the Bank of England (BoE).

Major Features of Capital Markets

  • The Capital Market provides a common ground for lenders and borrowers to connect.
  • It is a market of financial assets involving long maturity.
  • The market functions as per the regulations set by the Government.
  • The Capital Market uses several intermediaries, such as brokers, sub-brokers, depositories, collection bankers, underwriters, etc.
  • The market determines the rate of capital formation.

Functions of Capital Markets

  • Capital Markets help to mobilise financial resources at a country-wide scale.
  • Such a market boosts economic growth.
  • Capital Markets enable securing foreign capital.
  • It aims for enhanced efficiency in financial transactions.
  • A Capital Market helps in stabilising the prices of stocks and security.
  • The market provides for easy liquidity of investments.

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Types of Capital Markets

The Capital Market comprises two types of markets: Primary and Secondary.

Primary Market

A primary market is when new shares or securities issued by a company are sold to the public for the first time. It is also referred to as New Issue Market (NIM). The major investors in a primary market are banks, financial institutions, HNI investors, etc.

Secondary Market

A secondary market is one in which trading of previously issued securities occurs. In this type of market, the securities sold to investors aren't issued directly by the company. Rather, existing investors sell the securities to new investors. Companies receive no additional capital due to their securities trading, as trading takes place directly between the investors.

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The Function of SEBI in Capital Markets

The Securities and Exchange Board of India (SEBI) regulates India's Capital Markets. The main functions of SEBI in Capital Markets are:

  • SEBI conducts inquires and carries out an audit of exchanges.
  • SEBI works to prevent malpractices in the trading world.
  • The regulating body issues guidelines for stock exchange operations.
  • It regulates and registers the financial intermediaries involved in Capital Markets.
  • SEBI seeks to protect investors against fraud.

Capital Markets play an important role in enhancing the finance of investors. It is an avenue through which investors can put their additional capital to productive use. At the same time, it helps strengthen the economy of the country.

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FAQs on Capital Market

Q.1 What Are the Instruments Used in a Capital Market?

The typical instruments used in a Capital Market include bonds, shares, public deposits, debentures, etc.

Q.2 Does Money Market and Capital Market Refer to the Same Thing?

The money market and Capital Market are both financial markets. But the money market involves short-term transactions of less than a year, while the Capital Market involves long-term transactions.

Q.3 What Are Some Examples of Capital Markets?

Examples of Capital Markets include the American Stock Exchange, the New York Stock Exchange, and the London Stock Exchange.

Q.4 Who Are the Suppliers and Borrowers in a Capital Market?

In a Capital Market, suppliers can include banks and individual investors. Borrowers can include governments, businesses, and individuals.