MODULE II
CAPITAL MARKET
Capital Market-Meaning and Definition
Capital market is a major segment of the financial system of a country. It operate as a switching
mechanism for transfer of funds to meet the long term needs of the private and public enterprises.
Capital market is a vehicle through which long term finance is channelized for the various needs of
industry, commerce, govt. and local authorities. Generally, it deals with long term securities that
have a maturity period of above one year.
Refers to the institutional arrangements for facilitating the borrowing and lending of long term
funds. It is a market for buying and selling of equity, debt and other securities. These are known as
securities. It is for this reason that capital market is known as ‘Securities Market’.
Capital market may be defined as an organized mechanism for the effective and efficient transfer of
money capital or financial resources from the investors to the entrepreneurs.
According to W.H. Husband and J.C. Dockerbay,
“the capital market is used to designate activities in long term credit, which is characterised mainly
by securities of investment type”.
Characteristics of Capital Market
1. Capital market generally deals with long term securities.
2. It is a vehicle through which capital flows from the investors to borrowers.
3. All operations in the new issues and existing securities occur in the capital market.
4. It deals in many types of financial instruments. These include equity shares , preference
shares, debentures, bonds, etc.
5. It functions through a number of intermediaries such as banks, merchant bankers, brokers,
underwriters, mutual funds etc. They serve as links between investors and borrowers.
6. The constituents (players) in the capital market include individuals and institutions. They
include individual investors, investment and trust companies ,banks , stock exchanges,
specialized financial institutions etc.
7.It trade funds both securitized and non-securitized funds.
(Securitized- equity shares , preference shares ,debentures ,bonds , savings certificates etc.
Non-securitized-bank deposits, provident funds scheme , life insurance , company fixed
deposits etc.)
8.It channelizes funds from undesirable to desirable activities.
9.It composed of new issue or primary market , secondary market, government security
market and the long term loan market.
10. Capital market provides liquidity to the investment. Securities which are dealt in capital
market are transferable and marketable.
, 11. Generally the dealers in the capital market are well to do sections of the society.
12.The capital market is regulated and controlled by govt.
13.The corporate performance of a country is indicated by the state of capital market.
Functions of Capital Market
Capital market plays an important role in mobilising resources, and diverting them in productive
channels. In this way, it facilitates and promotes the process of economic growth in the country.
Various functions of capital market are -
1. Link between Savers and Investors:
The capital market functions as a link between savers and investors. It plays an important role in
mobilising the savings and diverting them in productive investment. In this way, capital market plays
a vital role in transferring the financial resources from surplus and wasteful areas to deficit and
productive areas, thus increasing the productivity and prosperity of the country.
2. Encouragement to Saving:
With the development of capital market, the banking and non-banking institutions provide
facilities, which encourage people to save more. In the less- developed countries, in the absence of a
capital market, there are very little savings and those who save often invest their savings in
unproductive and wasteful directions such as land, gold, and jewellery) and conspicuous
consumption.
3. Provision of Investment Avenue :
Capital market raises resources for longer periods of time. Thus it provides an investment
avenue for people who wish to invest resources for a long period of time. It provides suitable
interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds ,
insurance policies, etc. definitely provides diverse investment avenue for the public .
4.Proper Regulation of Funds :
Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these
resources. It can have regulation over the resources so that it can direct funds in a qualitative
manner.
5.Service Provision :
As an important financial set up capital market provides various types of services. It includes long
term and medium term loans to industry, underwriting services, consultancy services, export
finance, etc. These services help the manufacturing sector in a large spectrum.
6. Stability in Security Prices:
The capital market tends to stabilise the values of stocks and securities and reduce the fluctuations
in the prices to the minimum. The process of stabilisation is facilitated by providing capital to the
borrowers at a lower interest rate and reducing the speculative and unproductive activities.
7.Speed up Economic Growth and Development :
Capital market enhances production and productivity in the national economy. As it makes
funds available for long period of time, the financial requirements of business houses are met by the
, capital market. It helps in research and development. This helps in, increasing production and
productivity in economy by generation of employment and development of infrastructure.
8.Continuous Availability of Funds :
Capital market is place where the investment avenue is continuously available for long term
investment. This is a liquid market as it makes fund available on continues basis. Both buyers and
seller can easily buy and sell securities as they are continuously available. Basically capital market
transactions are related to the stock exchanges. Thus marketability in the capital market becomes
easy.
9. Benefits to Investors:
The credit market helps the investors, i.e., those who have funds to invest in long-term financial
assets, in many ways:
(a) It brings together the buyers and sellers of securities and thus ensure the marketability of
investments,
(b) By advertising security prices, the Stock Exchange enables the investors to keep track of their
investments and channelize them into most profitable lines,
(c) It safeguards the interests of the investors by compensating them from the Stock Exchange
Compensating Fund in the event of fraud and default.
Importance of Capital Market
The capital market plays an important role in mobilising saving and channelising them into
productive investments for the development of commerce and industry.
The importance of capital market are-
1. Mobilisation of savings:
Capital market helps in mobilizing the savings of the country. It gives an opportunity to the
individual investors to employ their savings in more productive channels.
2. Capital formation
Large amount is required to invest in infrastructural foundation. Such a large amount cannot
be collected from one individual or few individuals. Capital market provides an opportunity to collect
funds from a large number of people who have investible surplus.
3. Economic development:
With the help of capital market, idle funds of the savers are channelized to the productive
sectors. In this way, capital market helps in the rapid industrialization and economic development of
a country.
4. Integrates different parts of the financial system:
The different components of the financial system includes new issue market, money market,
stock exchange etc. It is the capital market which helps to establish a close contact among different
parts of the financial system. This is essential for the growth of an economy.
5. Promotion of stock market:
CAPITAL MARKET
Capital Market-Meaning and Definition
Capital market is a major segment of the financial system of a country. It operate as a switching
mechanism for transfer of funds to meet the long term needs of the private and public enterprises.
Capital market is a vehicle through which long term finance is channelized for the various needs of
industry, commerce, govt. and local authorities. Generally, it deals with long term securities that
have a maturity period of above one year.
Refers to the institutional arrangements for facilitating the borrowing and lending of long term
funds. It is a market for buying and selling of equity, debt and other securities. These are known as
securities. It is for this reason that capital market is known as ‘Securities Market’.
Capital market may be defined as an organized mechanism for the effective and efficient transfer of
money capital or financial resources from the investors to the entrepreneurs.
According to W.H. Husband and J.C. Dockerbay,
“the capital market is used to designate activities in long term credit, which is characterised mainly
by securities of investment type”.
Characteristics of Capital Market
1. Capital market generally deals with long term securities.
2. It is a vehicle through which capital flows from the investors to borrowers.
3. All operations in the new issues and existing securities occur in the capital market.
4. It deals in many types of financial instruments. These include equity shares , preference
shares, debentures, bonds, etc.
5. It functions through a number of intermediaries such as banks, merchant bankers, brokers,
underwriters, mutual funds etc. They serve as links between investors and borrowers.
6. The constituents (players) in the capital market include individuals and institutions. They
include individual investors, investment and trust companies ,banks , stock exchanges,
specialized financial institutions etc.
7.It trade funds both securitized and non-securitized funds.
(Securitized- equity shares , preference shares ,debentures ,bonds , savings certificates etc.
Non-securitized-bank deposits, provident funds scheme , life insurance , company fixed
deposits etc.)
8.It channelizes funds from undesirable to desirable activities.
9.It composed of new issue or primary market , secondary market, government security
market and the long term loan market.
10. Capital market provides liquidity to the investment. Securities which are dealt in capital
market are transferable and marketable.
, 11. Generally the dealers in the capital market are well to do sections of the society.
12.The capital market is regulated and controlled by govt.
13.The corporate performance of a country is indicated by the state of capital market.
Functions of Capital Market
Capital market plays an important role in mobilising resources, and diverting them in productive
channels. In this way, it facilitates and promotes the process of economic growth in the country.
Various functions of capital market are -
1. Link between Savers and Investors:
The capital market functions as a link between savers and investors. It plays an important role in
mobilising the savings and diverting them in productive investment. In this way, capital market plays
a vital role in transferring the financial resources from surplus and wasteful areas to deficit and
productive areas, thus increasing the productivity and prosperity of the country.
2. Encouragement to Saving:
With the development of capital market, the banking and non-banking institutions provide
facilities, which encourage people to save more. In the less- developed countries, in the absence of a
capital market, there are very little savings and those who save often invest their savings in
unproductive and wasteful directions such as land, gold, and jewellery) and conspicuous
consumption.
3. Provision of Investment Avenue :
Capital market raises resources for longer periods of time. Thus it provides an investment
avenue for people who wish to invest resources for a long period of time. It provides suitable
interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds ,
insurance policies, etc. definitely provides diverse investment avenue for the public .
4.Proper Regulation of Funds :
Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these
resources. It can have regulation over the resources so that it can direct funds in a qualitative
manner.
5.Service Provision :
As an important financial set up capital market provides various types of services. It includes long
term and medium term loans to industry, underwriting services, consultancy services, export
finance, etc. These services help the manufacturing sector in a large spectrum.
6. Stability in Security Prices:
The capital market tends to stabilise the values of stocks and securities and reduce the fluctuations
in the prices to the minimum. The process of stabilisation is facilitated by providing capital to the
borrowers at a lower interest rate and reducing the speculative and unproductive activities.
7.Speed up Economic Growth and Development :
Capital market enhances production and productivity in the national economy. As it makes
funds available for long period of time, the financial requirements of business houses are met by the
, capital market. It helps in research and development. This helps in, increasing production and
productivity in economy by generation of employment and development of infrastructure.
8.Continuous Availability of Funds :
Capital market is place where the investment avenue is continuously available for long term
investment. This is a liquid market as it makes fund available on continues basis. Both buyers and
seller can easily buy and sell securities as they are continuously available. Basically capital market
transactions are related to the stock exchanges. Thus marketability in the capital market becomes
easy.
9. Benefits to Investors:
The credit market helps the investors, i.e., those who have funds to invest in long-term financial
assets, in many ways:
(a) It brings together the buyers and sellers of securities and thus ensure the marketability of
investments,
(b) By advertising security prices, the Stock Exchange enables the investors to keep track of their
investments and channelize them into most profitable lines,
(c) It safeguards the interests of the investors by compensating them from the Stock Exchange
Compensating Fund in the event of fraud and default.
Importance of Capital Market
The capital market plays an important role in mobilising saving and channelising them into
productive investments for the development of commerce and industry.
The importance of capital market are-
1. Mobilisation of savings:
Capital market helps in mobilizing the savings of the country. It gives an opportunity to the
individual investors to employ their savings in more productive channels.
2. Capital formation
Large amount is required to invest in infrastructural foundation. Such a large amount cannot
be collected from one individual or few individuals. Capital market provides an opportunity to collect
funds from a large number of people who have investible surplus.
3. Economic development:
With the help of capital market, idle funds of the savers are channelized to the productive
sectors. In this way, capital market helps in the rapid industrialization and economic development of
a country.
4. Integrates different parts of the financial system:
The different components of the financial system includes new issue market, money market,
stock exchange etc. It is the capital market which helps to establish a close contact among different
parts of the financial system. This is essential for the growth of an economy.
5. Promotion of stock market:
