Capital market is referred to as a place where saving and investments are done between capital suppliers and those who are in need of capital. It is, therefore, a place where various entities trade different financial instruments.
There are two types of capital market:
- Primary Market
- Secondary Market
Capital market is where both equity and debt instrument like equity shares, preference shares, debentures, bonds, etc. are bought and sold.
Functions of Capital Market:
- It acts in linking investors and savers
- Facilitates the movement of capital to be used more profitability and productively to boost the national income
- Boosts economic growth
- Mobilization of savings to finance long term investment
- Facilitates trading of securities
- Minimization of transaction and information cost
- Encourages a massive range of ownership of productive assets
- Quick valuations of financial instruments
- Through derivative trading, it offers insurance against market or price threats
- Facilitates transaction settlement
- Improvement in the effectiveness of capital allocation
- Continuous availability of funds
The capital market is the best source of finance for companies. It offers a spectrum of investment avenues to all investors which encourage capital creation.
Types of Capital Market
Classification of capital market
- Primary Market: The primary market is a new issue market; it solely deals with the issues of new securities. A place where trading of securities is done for the first time. The main objective is capital formation for government, institutions, companies, etc. also known as Initial Public Offer (IPO). Now, let us have a look at the functions of primary market:
- Origination: Origination is referred to as examine, evaluate, and process new project proposals in the primary market. It begins prior to an issue is present in the market. It is done with the help of commercial bankers.
- Underwriting: For ensuring the success of new issue there is a need for underwriting firms. These are the ones who guarantee minimum subscription. In case, the issue remains unsold the underwriters have to buy. But if the issues are completely subscribed then there will be no liability left for them.
- Distribution: For the success of issue, brokers and dealers are given job distribution who directly contact with investors.
- Secondary Market: The secondary market is a place where trading takes place for existing securities. It is known as stock exchange or stock market. Here the securities are bought and sold by the investors. Now, let us have a look at the functions of secondary market:
- Regular information about the value of security
- Offers liquidity to the investors for their assets
- Continuous and active trading
- Provide a Market Place