INTRODUCTION

As every country today is aiming at reaching the status of developed country, the
most important input they require is the investment. Where do they get their
investments? Capital Market is the place where the economy can pool up funds
required for their investment needs. In the modern scenario of globalization
Capital Market plays a vital role in any economy. The strong presence of Capital
Market resembles the strength of the economy.

A Capital Market is a market for Securities (both Debt and Equity), where
Companies and Governments can raise long-term funds. It is defined as a market in
which money is lent for long periods. The Capital Market includes the Equity
Market {Stock Market} and the Debt Market {Bonds}.

The financial instruments that have short or medium term maturity periods are
dealt in the Money Market whereas the financial instruments that have long
maturity periods are dealt in the Capital Market.

COMPONENTS OF CAPITAL MARKET

Capital Market Consists Of:

EQUITY MARKETS {STOCK MARKET}, which provide financing through the issuance of
shares, and enable the subsequent trading thereof.
DEBT MARKETS {BOND MARKET}, which provide financing through the issuance of bonds,
and enable the subsequent trading thereof.

FEATURES OF CAPITAL MARKET

Channelisation Of Funds: The primal role of the capital market is to channelize

investments from investors who have surplus funds to the ones who are running a
deficit. The capital market offers both long term and overnight funds.

Trading Platform: The primary role of the capital market is to raise long-term
funds for governments, banks, and corporations while providing a platform for the
trading of securities.

Ready & Continous Market: Fund-raising in the capital market is regulated by the
performance of the stock and bond markets within the capital market. The member
organizations of the capital market may issue stocks and bonds in order to raise
funds. Investors can then invest in the capital market by purchasing those stocks
and bonds.

Regulation of the Capital Market: Every capital market in the world is monitored
by financial regulators and their respective governance organization. The purpose
of such regulation is to protect investors from fraud and deception. Financial
regulatory bodies are also charged with minimizing financial losses, issuing
licenses to financial service providers, and enforcing applicable laws.

The Capital Market’s Influence on International Trade: Capital market investment

is no longer confined to the boundaries of a single nation. Today’s corporations
and individuals are able, under some regulation, to invest in the capital market
of any country in the world. Investment in foreign capital markets has caused
substantial enhancement to the business of international trade.

RISK INVOLVED IN CAPITAL MARKET

The capital market, however, is not without risk. It is important for investors to
understand market trends before fully investing in the capital market. Any
investor should considers the following factors of risk while investing in the
Capital Markets : -

1. VOLATILITY RISK AND RISK OF CONTAGIONS: High volatality is the characteristic

of any capital market, especially in emerging markets. They are immature and
sometimes vulnerable to scandal. They often lack legal and judicial infrastructure
to enforce the law. Accounting disclosure, trading and settlement practices may at
times seem overly arbitrary and naïve. Against this backdrop, many emerging
markets have had to cope with unprecedented inflows and outflows of capital. The
sudden withdrawal of highly speculative, short-term capital has the potential of
taking with it much of a market's price support. Such sudden flights of capital
triggered by events in one emerging market can spread instantly to other markets
through contagion effects even when those markets have quite different conditions.

2. LIQUIDITY RISK: Many emerging markets are small and illiquid. Volumes of trade
are quite low. This kind of thin trading often leads to higher costs because large
transactions have a significant impact on the market. Thus, buyers of large blocks
of shares may have to pay more to complete the transaction, and sellers may
receive a lower price.

3. CLEARANCE AND SETTLEMENT RISK: Inadequate settlement procedures still exist in

many of the emerging markets. They lead to high FAIL rates. A Fail occurs when a
trade fails to settle on the settlement date.

4. POLITICAL RISK: In most of the developing countries the political systems are
less stable comparative to the developed countries. This scenario does not give
the political system to concentrate more on the capital market happenings and
restrict any kind of malfunctions or practices.

5. CURRENCY RISK: The trade in capital markets will be highly impacted by the
fluctuations in the foreign exchange rates. The currencies of the emerging
countries are not stable enough to compete with those of the developed countries.
This leads towards unexpected losses for the investors in the markets.

6. LIMITED DISCLOSURE AND INSUFFICIENT LEGAL INFRASTRUCTURE: As it is already

mentioned earlier that disclosure levels will not be up to the required extent in
emerging markets, the investors will not have a bright picture of the company in
which they are investing, and this may lead towards losses.

INDIAN CAPITAL MARKET

Financial regulators, such as the Reserve Bank of India & Securities & Exchange
Board of India {SEBI}, oversee the capital markets in their designated
jurisdictions to ensure that investors are protected against fraud, among other
duties.

The Prime Minister of India Dr. Manmohan Singh, on the occasion of 125 years
celebrations of Bombay Stock Exchange {BSE} said, "Capital Markets are the
prerequisites to the health of the economy. Indian Capital Market has now begun to
transform rapidly in the past five years to offer world-class services to the
investors".

A capital market can provide huge impetus to the development of any economy, so it
can be said that the growth and sustainability of capital markets plays an
important role towards the development of the economy. It is being observed that
huge fluctuations are happening in Indian Capital Market in recent past, but with
the help of proper mechanism, which is being observed in India and after examining
various risk factors involved in capital markets, we attempt to say that the
growth which has been observed in Indian Capital Market in recent past is a
realty, but not a myth.

Right from the independence, thanks to steps initiated by the Indian government
especially after the post liberalization era. A huge growth has been observed in
the aspects of quality and quantity. Huge increase has been observed in the
volumes of trade.

A steady and growing market size, reliable business community, high levels of
intellectual manpower, technological expertise and a dedicated reform process that
has brought about impressive economic liberalization, has made India a very
attractive destination for investments in capital markets.