Meaning of Capital Market
Capital Market
is generally understood as the market for long-term funds. This market supplies
funds for financing the fixed capital requirement of trade and commerce as well
as the long-term requirements of the Government. The long-term funds are made
available through various instruments such as debentures, preference shares,
and common shares. The capital market can be local, regional, national, or
international. The capital market is classified into two categories, namely,
Ø
Primary market or new issue market, and
Ø
Secondary market or stock exchange.
As a rule, only
when a country’s primary market is alone, it is possible to ensure a good
degree of activity in the secondary market because it is the primary market
which ensures a continuous flow of securities to the secondary market.
On the contrary,
if secondary marker is only active but not transparent and disciplined, it
becomes difficult to develop and sustain the flow of equity and related
investment in the primary market. This is because the liquidity which the secondary
market imparts to such investments in the hands of the investors is adversely
affected.
Importance of Capital Market
Capital markets
are markets where productive capital is raised and made available for
industrial purposes. Importance of Capital Market are mentioned below:
a)
It provides an avenue for investors and
household sector to invest in financial assets which are more productive than
physical assets. A developed capital market can solve the problem of paucity of
funds.
b)
It facilitates increase in production and
productivity in the economy and hence enhances the economic welfare of the
society. Indian capital market acts as an intermediary to mobilize savings and
to channelize the same for productive use consistent with national priorities.
c)
The industrial securities issued through the
primary market are traded in the secondary market which provides liquidity and
short-term as well as long-term yields.
d)
An efficient primary market prepares base for
effective and cost efficient mobilization of resources by bringing together the
users and investors of funds.
Thus, both the
primary and secondary markets helps each other and make the capital market
efficient, healthy, and strong
Distinction
Between Capital Market and Money Market
The capital market
should be distinguished from money market. The capital market is the market for
long-term funds. On the other hand money market is primarily the market for
shortterm funds. However, the two markets are closely related as the same
institution many a times deals in both types of funds, i.e. short-term as well
as long-term. The main points of distinction between the two markets are as
under :
Capital
Market
|
Money
Market
|
1. It provides finance/money capital for
long-term investment.
|
1. It provides finance/money for short-term
investment.
|
2. The finance provided by the capital market may
be used both for fixed and working capital.
|
2. The finance provided by money market is
utilized, usually for working capital.
|
3. Mobilisation of resources and effective
utilization of resources through lending are its main functions.
|
3. Lending and borrowing are its principal
functions to facilitate adjustment of liquidity position.
|
4. It’s one of the constituents, Stock Exchange
acts as an investment market for buyers and sellers of securities.
|
4. It does not provide such facilities. The main
components include call loan market, collateral loan market, bill market and
acceptance houses.
|
5. It acts as a middleman between the investor
and the entrepreneur.
|
5. It acts as a link between the depositor and
the borrower.
|
6. Underwriting is one of its primary activities.
|
6. Underwriting is a secondary function.
|
7. Its investment institutions raise capital from
public and invest in selected securities so as to give the highest possible
return with the lowest risk.
|
7. It provides outlets to commercial banks,
business corporations, non-bank financial concerns and other for their
short-term surplus funds.
|
8. It provides long-term funds to Central and
State Governments, public and local bodies for development purposes.
|
8. It provides short-term funds to Government by
purchasing treasury bills and to others by discounting bills of exchange etc.
|
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