Last updated on April 2nd, 2024 at 07:08 am
The financial market provides convenience and means for sellers and buyers to trade or exchange different modes of financial assets. The money market and the capital market are two types of financial markets.
The capital market primarily deals with the stock and bond markets and provides long-term financing to governments, businesses, and other entities. Equities and debt securities are sold through the capital market. The money market comprises instruments like treasury bills, certificates of deposits, commercial papers, call money and repo rate. Potential candidates looking to upskill can look up capital market courses several institutes offer to gain in-depth knowledge.
This blog is perfect for finance aspirants wanting to learn about the capital market, its types, associated components and their importance in an economy.
Types of Capital Market
The two types of capital markets are as follows -
Primary market
It is a financial system where a company introduces new securities, bonds, stocks or initial public offering (IPO) in exchange for cash. Thus, fresh investment is pumped into the financial market. The fund thus generated helps the company invest in capital assets like land, machinery and other similar aspects required for the company's expansion.
Secondary market
This financial system enables buyers and sellers to exchange previously issued securities, bonds, debentures or stocks. The secondary market also aims to raise the fund value so that both sellers and buyers benefit. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are examples of secondary markets in India.
Stakeholders of Capital Market
There are two types of stakeholders in the capital market:
Suppliers of funds
Suppliers of funds typically consist of banks, insurance houses, and institutions holding public pension or retirement funds.
Users of funds
Users are private and government institutions financing projects, business houses, manufacturers, and even individuals contemplating home and vehicle purchases.
Intermediaries of Capital Market
Organisations or individuals who assist in bridging gaps between the surplus and deficit parties are termed financial intermediaries. The different intermediaries of capital markets are as follows -
- Brokers - They may be individuals or firms who help parties to buy and sell shares in exchange for commissions.
- Stock exchanges - BSE and NSE are the standard Indian stock exchanges where financial transactions occur.
- Regulatory body - The Securities Exchange Board of India(SEBI) monitors the capital market in our country.
Instruments of Capital Market
The instruments of the capital market are as follows -
Stocks or shares
Companies issue stocks or shares and represent their ownership. The shareholders enjoy quarterly dividends against their purchased shares. The quantum of return on investment depends on the financial performance of companies.
Stakeholders having equity shares may voice their decision in the annual general meeting of the concerned companies. They are even entitled to get a share of assets in case of liquidation after all debts are cleared.
Bonds
Bonds are debt securities companies issue to raise funds for growth and expansion. Bond buyers receive interest and the principal amount at the end of the maturity period.
Currency
Foreign markets use currency as their financial instrument through three types of agreement — spot, outright forward and currency swap.
Derivatives
These are secondary instruments in the capital markets derived from their original counterparts like bonds, shares, currency etc.
Functions of a Capital Market
There are several essential functions of a capital market, some of which are listed below:
Capital formation
Capital is created using surplus funds from investors or financial institutions for business houses looking for expansion. Investors choose to use the excess money in this capital market since sitting cash does not reap any benefit.
Economic growth
The capital market boosts the country’s economic prosperity. Money put into the system fosters business growth by creating fresh demand in the market. A business house may raise cash by offering a portion of its business in the stock market or through debt instruments like bonds.
Liquidity
The capital market system provides cash liquidity to people or institutions at the time of demand. It is a solid assurance to investors.
Price regulation
Monitoring and regulating the price of a financial asset is a primary function of the capital market. Favourable news for a company hikes its stock prices, whereas negative news is perceived as a setback leading to a drop in its share. The system tries to prevent intentional malpractice or foul play that may lead to these changes.
Features of Capital Market
The various features of the capital market are as follows -
No entry or exit barriers
Investment opportunities are available to everyone without entry restrictions or exit hindrances. Investors may enter the market whenever they wish and exit as they feel right. It creates a system balance with plenty of buyers and sellers.
Utilisation of savings
Capital market motivates and helps channelise idle savings to investment, which pays returns and boosts the economy.
Multiple opportunities for investors
An investor may choose from a bouquet of investment options. High-risk investments are generally associated with higher growth potentials, whereas investments in bonds and securities are safer.
Source of regular income
The capital market allows individuals to invest in shares and earn dividends, which generate regular income.
Tax benefit
Investment in stock markets leads to tax benefits at times.
Wealth creation
Investment is aimed solely at wealth creation as performed by the capital market. It also helps in long-term investment.
Retirement benefits
Pension or superannuation funds are a product of the capital market.
Conclusion
With our country growing as one of the fastest global economies, the capital market has gained tremendous momentum. Extensive knowledge in the field can help exploit the growing employment opportunities in the sector. Enrolling in a capital market course can be the best step towards that goal.
The Advanced Management Programme in Financial Services and Capital Markets by Imarticus offers candidates an interactive learning environment with renowned faculty helming the course. This IIM Lucknow finance course spans 11 months. It provides a 5-day campus immersion allowing students to attend on-campus classes, master classes from industry experts, and capstone projects on an industry-relevant curriculum.
Visit the official website of Imarticus for more course-related details.
