Savings and investments are channeled through capital markets between suppliers and those in need. Banks and investors are examples of suppliers because they have capital to lend or invest. Businesses, governments, and individuals are all looking for capital in this market. Primary and secondary markets comprise capital markets. The stock market and the bond market are the two most common capital markets. They aim to improve transactional efficiencies by bringing suppliers and those seeking capital together and providing a venue for them to exchange securities.
KEY TAKEAWAYS
- Capital markets are exchanges of funds between suppliers and those seeking capital for their own use.
- Capital market suppliers are typically banks and investors, while those seeking capital are businesses, governments, and individuals.
- Capital markets are used to sell various financial instruments such as stocks and bonds.
- These markets are classified as primary and secondary markets.
- The stock and bond markets are the most well-known capital markets.
Structure of Capital Market in India
Market
Two type of market :-
- Primary market :- It is the market for new issues, in which companies issue stock for the first time through an Initial Public Offering (IPO). When the IPO is successful, the company’s shares are listed on the stock exchange. Money is raised in the primary market through private placements, rights issues, and prospectuses. The funds are being raised to help the company grow and expand.
- Secondary market :- It is the market for new issues, in which companies first issue stock through an Initial Public Offering (IPO). The company’s shares are listed on the stock exchange if the IPO is successful. Private placements, rights issues, and prospectuses are used to raise funds in the primary market. The funds are being raised to assist the company in growing and expanding.
Instruments
The market consists majorly of five types of instruments:
- Stocks: Stocks represent a company’s ownership. Each share contributes to the company’s ownership. Shares are traded on the stock exchange, and their value is determined by market demand and supply. The shareholder is the person who owns stock in a company. Dividends are paid to shareholders. In the case of equity shares, they also have voting rights and can vote on important company decisions at the annual general meeting. They receive a share of the assets after the liabilities are paid off during liquidation.
- Bonds: Bonds are stock exchange-traded debt securities. Companies and firms issue bonds to raise funds for the company’s growth and expansion. Because bonds are debt instruments, bondholders receive interest. At the end of the maturity period, the company repays the principal plus interest.
- Exchange-Traded Funds: Exchange-traded funds are a pool of investors’ money that is used to buy a variety of capital market instruments, such as stocks, debt securities like bonds, and derivatives.
- Derivatives: Derivatives are financial instruments whose values are derived from the underlying assets. Currency, bonds, and stocks are examples of such assets.
- Currency: Currency is a financial instrument in foreign markets. Currency agreements are classified into three types: spot, outright forwards, and currency swaps.
Intermediaries
The following are the intermediaries:
Financial intermediaries are companies that help with money transfers. They act as a bridge between surplus and deficit parties. As an example:
- Brokers: A broker assists in buying and selling shares for a commission.
- Stock Exchanges: For example, the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and so on.
- Regulator: The capital markets in India are governed by the Securities Exchange Board of India (SEBI).
Functions of a Capital Market
A capital market is a marketplace for long-term financial assets. It is critical in mobilizing resources and allocating them to appropriate channels. As a result, the capital market aids a country’s economic development.
The following are the functions:
- It transfers cash and other forms of savings from parties to financial markets. It bridges the gap between those who have capital and those who need it.
- Greater risks can result in greater profits for investors.
- Capital markets also help to stabilize stock prices while also facilitating capital mobilization. Stock exchange instruments, for example, are liquid for participants.
- As a result, the availability of funds is an ongoing process. Platforms such as the National Stock Exchange and the Bombay Stock Exchange aid in this endeavor. It reduces the cost of information and transactions.
- Brokers and traders, for example, facilitate the transfer of capital and shares between two investors. This helps them run their business.
Features of a Capital Market
The following are the features of capital markets:
- Safety: The capital markets are regulated by the government. They operate according to a set of rules. As a result, investors regard it as a secure trading environment.
- Channelizes savings: Capital markets serve as a conduit for savers and investors. They channel savings from savers to industry players, thereby promoting economic growth.
- Long term investment: Capital markets serve as a foundation for long-term investments. Any investor interested in making long-term investments can do so through capital markets.
- Wealth Creation: The capital market allows investors with excess funds to invest in capital market instruments such as stocks and bonds and create wealth for themselves through the power of compounding.
- Helps intermediaries: The capital market transfers savings from savers to borrowers through the use of intermediaries such as stock exchanges, brokers, banks, and so on. In this way, the capital market assists intermediaries in conducting business and earning income.
How does it work?
For example, when you start a new business, it takes a few years to generate consistent revenue. Short-term money market funds such as commercial papers, bills, and treasuries cannot be used to manage business expenses.
As a result, in a capital market, an individual or organization with excess funds agrees to invest in a business for the mutual benefit of both parties in the long run. To raise funds, securities are issued in the primary market. After conducting research on the company, interested parties purchase those shares through the IPO process. The first shares are then traded on the secondary market. This process is made possible by intermediaries.
FOR MORE INFO CLICK THIS SITE:https://learningsharks.in/
FOLLOW OUR PAGE:https://www.instagram.com/learningsharks/?hl=en