Capital markets are venues where savings and investments are channeled between suppliers who have the capital and those who are in need of capital. The entities that have capital include retail and institutional investors while those who seek capital are businesses, governments, and the common man. It is a financial market in which long-term debt or equity-backed securities are bought and sold. financial securities are transacted like shares, debentures, debt instruments, bonds, derivative instruments like futures, forwards, options, and swaps.
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Capital market instruments possess a lot of liquidity which means they can be easily converted to cash and cash equivalents when in need of immediate cash. Also, there is a lot of diversification as it offers a wide range of investments. Commercial banks, financial institutions, insurance companies, business corporations, and retirement funds are the major suppliers of funds in the capital markets. Financial regulators oversee capital markets to protect investors against fraud among other duties. The financial regulators include the Securities and Exchange Board of India, the Bank of England, and the US Securities and Exchange Commission.
Functions of Capital Markets:
- Facilitates trading of securities
- Boosts economic growth
- There is the continuous availability of funds
- Quick valuation of financial instruments
- Transaction and information cost is minimized
- Creates a linkage between investors and savers
- It encourages a massive range of ownership of productive assets
- Capital markets offer insurance against market risk
Types of Capital Markets:
There are two types of capital markets.
- Primary market
It is a market where freshly issued securities are traded which means that they are traded for the first time. It is also called a new issues market. This market enables both an initial public offering and a further public offering. The main function of the primary market is to facilitate the transfer of the newly issued shares from the companies to the public. The main investors in this type of market are the financial market, banks, HNIs, etc. The main functions of the primary market are as follows-
- Origination is referred to as examining, evaluating, and processing new project proposals in the primary market. It begins prior to an issue present in the market. It is done with the commercial bankers.
- Underwriting is a guarantying minimum subscription. In case the issue remains unsold the underwriters have to buy it but if the entire issue is completely sold then there is no liability left for the underwriters.
- Distribution is done by the brokers and dealers who are given job distribution to directly contact the investors.
- Secondary market
It is the market where the trading of the securities actually takes place thus it is also referred to as the stock market. The buying and selling of securities take place by the existing investors selling the securities and the new investors buying them. Functions of the secondary market are as follows-
- They provide a marketplace for all the investors to trade.
- Continuous and active trading takes place.
- Regular information is available about the value of the security.
- Offers liquidity to the investors for their assets.
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Though the capital market performs its functions similar to the money market it is different in the sense that it usually deals with long-term securities. It is a well-regulated and organized market and has the power to move savings from a less productive means to a route where there is a need for capital and where capital is also rewarded. Although it may be very risky in terms of providing significant fixed returns periodically, it is very much preferred because of the anticipation of the long-term propitious performance.
Author –Sanjana Rau
About the author- Started my journey of self even when the odds were against me, keen observation, a cool temper, and sports worked the best for me.