Economics Notes on Capital Market for SSC Exam

Economics is the main section of GS portion in SSC CGL. It contributes about 5 to 6 marks in SSC CGL and other competitive exams. This article is all about Capital Markets and its features. Go through it.

Capital Markets

The capital market is one of the two essential parts of the financial system (the other being the money market).

Capital markets are the financial markets for the buying and selling of long-term debt (amount owed for a period exceeding 12 months from the date of the balance sheet) or equity-backed securities (or asset-backed securities).

Capital markets in India are the markets for medium-term and long-term funds; they refer to all the facilities and institutional arrangements for borrowing and lending term-funds – medium term and long term.

These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies/ governments making long-term investments. Capital markets are defined as markets in which money is provided for periods longer than a year.

The supply of funds for the capital markets comes largely from individual savers (they supply through banks and insurance companies), corporate savers, commercial banks, insurance companies, public provident funds and other specified agencies.

Capital market instruments used for market trade include stocks and bonds, treasury bills, foreign exchange, fixed deposits, debentures, etc. As they involve debts and equity securities, the instruments are also called securities, and the market is referred to as securities market.

This market helps the investors in the following ways:

• It ensures the marketability of investments,
• By advertising security prices, the Stock Exchange enables the investors to keep track of their investments and channelize them into most profitable lines,
• It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating Fund in the event of fraud and default.

      

           Some Sample Questions

Q1. What are the three essential components of capital market?
There are three component of capital market are:-
– EQUITY MARKET
– DEBT MARKET
– DERIVATIVE MARKET

Q2. Under which organisation regulation of  capital market comes?
 Security and exchange board of India (SEBI) regulates the capital market

Q3. What is “Gilt-Edged Market”?
The market refers to government and semi-government securities which are supported by RBI and is called GILT-EDGED market

Q4. Name the financial institutions that provide credit to various sectors of economy?
Following are the financial institutions that provide credit to various sectors of economy:-
Commercial banks
Regional rural banks (RRBs)
Urban co-operative banks (UCBs)
State co-operative banks (STCBs)
District central co-operative banks (DCCBs)
Primary agriculture credit society (PACS)
State co-operative and agriculture rural development banks (SCSCARDBs)
Primary co-operative and agriculture rural development banks (PCARDBs)
Financial institutions
Non-banking financial companies (NBFCs)

Features:

The capital market has the following features:

Link between Savers and Investment Opportunities:

Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to entrepreneurial borrowers. The funds can be channelized for investment purposes and generation of future capital by the investors and for the savers money can be deposited in the form of a ‘security’

Deals in Long Term Investment:

Capital market provides funds for long and medium term. It does not deal with channelizing saving for less than one year.

Utilizes Intermediaries:
Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of capital market and are very important elements of the capital market.

Determinant of Capital Formation:

The activities of the capital market determine the rate of capital formation in an economy. Capital market offers attractive opportunities to those who have surplus funds so that they invest more and more in capital market and are encouraged to save more for profitable opportunities.

Government Rules and Regulations:

The capital market operates freely but under the guidance of government policies. These markets function within the framework of government rules and regulations.

Regulations in India

Indian Capital Markets are regulated and monitored by the Ministry of Finance, The Securities and Exchange Board of India and The Reserve Bank of India.

The Ministry of Finance regulates through the Department of Economic Affairs – Capital Markets Division. The division is responsible for formulating the policies related to the orderly growth and development of the securities markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors. In particular, it is responsible for

institutional reforms in the securities markets,

building regulatory and market institutions,

strengthening investor protection mechanism, and

providing efficient legislative framework for securities markets.

 The Division administers legislations and rules made under the

Depositories Act, 1996,

Securities Contracts (Regulation) Act, 1956 and

Securities and Exchange Board of India Act, 1992.

The Regulators

Securities & Exchange Board of India (SEBI)

 The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India. SEBI’s primary functions include protecting investor interests, promoting and regulating the Indian securities markets. All financial intermediaries permitted by their respective regulators to participate in the Indian securities markets are governed by SEBI regulations, whether domestic or foreign. Foreign Portfolio Investors are required to register with DDPs in order to participate in the Indian securities markets.

 

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act, 1934. The RBI is responsible for implementing monetary and credit policies, issuing currency notes, being banker to the government, regulator of the banking system, manager of foreign exchange, and regulator of payment & settlement systems while continuously working towards the development of Indian financial markets. The RBI regulates financial markets and systems through different legislations. It regulates the foreign exchange markets through the Foreign Exchange Management Act, 1999.

 

National Stock Exchange (NSE) – Rules and Regulations

In the role of a securities market participant, NSE is required to set out and implement rules and regulations to govern the securities market. These rules and regulations extend to member registration, securities listing, transaction monitoring, compliance by members to SEBI / RBI regulations, investor protection etc. NSE has a set of Rules and Regulations specifically applicable to each of its trading segments. NSE as an entity regulated by SEBI undergoes regular inspections by them to ensure compliance.

ROLE OF CAPITAL MARKET

The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities. The member organizations of the capital market may issue stocks and bonds in order to raise funds.

Investors can then invest in the capital market by purchasing those stocks and bonds. The capital market, however, is not without risk.

It is important for investors to understand market trends before fully investing in the capital market. To that end, there are various market indices available to investors that reflect the present performance of the market.

CAPITAL MARKET RISK

The capital market risk usually defines the risk involved in the investments. The stark potential of experiencing losses following a fluctuation in security prices is the reason behind the capital market risk. The capital market risk cannot be diversified.

The capital market risk can also be referred to as the capital market Systematic Risk. While an individual is investing in a security, the risk and return cannot be separated. The risk is the integrated part of the investment. The higher the potential of return, the higher is the risk associated with it.

 LIST OF SOME IMPORTANT STOCK-EXCHANGES AROUND THE WORLD

New York Stock Exchange —$18.8-trillion. The NYSE’s value is not only the highest on earth, but is worth almost three times as much as its nearest competitor, the NASDAQ. Companies listed include many of the world’s largest like Apple, Facebook, and Google. 
NASDAQ — $7.5-trillion. Second, but second by a long way, is the NASDAQ. Short for National Association of Securities Dealers Automated Quotations, the New York-based exchange includes eBay etc.Japan Exchange Group — $4.9 trillion. The biggest exchange outside of the USA, the Japan Exchange Group controls Japan’s world famous Nikkei 225, the index often cited as the stock bellwether for the entirety of Asia.Shanghai Stock Exchange — $3.9 trillion. China’s largest stock exchange, based in the country’s financial centre, Shanghai.
National Stock Exchange of India — $1.6 trillion. One of two Indian stock exchanges to feature on this list, worth marginally less than its counterpart the Bombay Stock Exchange. State Bank of India is one of the most prominent companies to feature. 
Korea Exchange — $1.4 trillion. Korea Exchange and its main constituent, the KOSPI, includes companies like tech giant Samsung, and car firm Kia. It is based out of South Korea’s capital, Seoul.

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