What is a Capital Market? Its Meaning and Functions

The capital market is a platform that allows individuals, businesses, and governments to buy and sell financial instruments. Organisations can sell various securities to retail investors and financial institutions like banks to raise capital. So, the capital market acts as an essential link between investors and organisations looking to obtain funds. To understand what is capital market is in detail, you can read this article.

Key Highlights

• The capital market refers to the place where different financial instruments are traded, allowing companies and governments to obtain funds.

• Stock exchanges facilitate the functioning of capital markets. Venture capitalists, investment banks, and brokerage houses act as intermediaries.

• The regulatory bodies monitor all the transactions in the capital market.

Capital Market Meaning

The capital market definition refers to the platform where financial products are traded. A few examples of capital markets are stock market, bond, and currency markets (forex). They make it easier to buy and sell financial instruments like zero-coupon bonds, preference shares, debentures, and equity shares.

Capital markets support organisations by offering a platform for obtaining capital to run companies or increase wealth. Capital markets typically offer financial instruments like ownership shares in a firm- stocks or other debt assets like bonds, which also carry interest.

Types of Capital Market

Primary markets and secondary markets are the two main types of capital markets.

Primary Markets

Companies offer new shares or bonds in the primary market. Here, companies and governments look for fresh funding. It's also known as the 'New Issues Market'.

Debt and stocks are the two main financial instruments traded in primary capital markets. New stocks are issued in the market through an initial public offering or IPO. It's the process of raising money by selling a portion of the ownership in a company to the general public. On the other hand, bonds are debt securities that allow a company or government to obtain funds for a specified period.

Secondary Markets

Securities and bonds are traded on the secondary capital market. The trading takes place through exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The secondary market is used by investors to raise money to invest in stocks and other securities like bonds. The secondary market is regulated by the Securities and Exchange Board of India (SEBI), which oversees the operations of stock exchanges, intermediaries, and market participants. SEBI's regulations aim to promote transparency, protect investor interests, and maintain market integrity.

Functions of Capital Market

The following are the functions of the capital market:

• Links investors and borrowers: The role of capital markets is to act as a middleman between those who have extra money and those who don't.

• Formation of capital: An essential component of the capital market is capital formation. It provides funds on time to meet the financial needs of various economic sectors.

• Control security prices: Capital markets promote the stability and systematic pricing of securities. It assures that the securities are traded fairly and transparently. The borrower is charged a standard interest rate or a minimum interest rate. Due to this, security prices in the economy stabilise.

• Offers opportunities to investors: The capital markets provide a variety of financial instruments to meet the demands of each investor. Although there are some risks, investors can obtain a better rate of return by investing in the capital market.

• Reduces transaction time and cost: In the capital market, the entire trading procedure is expedited, streamlined, and costs less. Every step of the trading process is automated, which speeds up the entire procedure.

• Capital liquidity: On the capital markets, investors can sell their assets to a third party for cash.

Conclusion

The capital market is a financial platform where buyers and sellers trade securities like stocks and bonds. It helps in making available funds to those organisations who need capital. It gives companies access to funds for expansion and enables governments to finance projects. Moreover, it also offers investors diverse opportunities to grow their wealth. Hence, the capital market plays an essential role in financial market, and overall economic development.