Capital Market

Capital Market
Definition of Capital Market:

H.T. Parkekh states "By capital market, I mean the market for all the financial
instruments, short-term and long-term, as also commercial, industrial and
Government paper".

Meaning of Capital Market:

Capital market is, generally, used to refer to the market for long-term funds.
In detail, capital market refers to the institutions and mechanism for the
effective pooling of long-term funds from the investing parties, i.e., individual
and institutional savers, and making them available to industrial and
commercial undertakings. In short, it is the market which deals in shares,
debentures, bonds and securities.

Features of Capital Market:

(i) Capital market deals in long-term and medium term funds.

(ii) It is concerned with the transfer of long-term and medium-term funds

from investing parties to industrial and commercial enterprises.

(iii) Ownership securities like equity shares and preference shares and
creditorship securities like debentures and bonds are dealt in capital market.

(iv) Capital market is composed of new securities market (i.e., primary

capital market), stock market (i.e., secondary capital market) and special
financial institutions.

(v) The dealers in the capital market are the industrial and commercial
enterprises, and the investors like individuals and institutional investors.

(vi) Capital market makes long-term funds available, i.e., makes funds
available for investment on fixed assets.

(vii) Capital market arranges large amount of funds.

Functions and Importance of Capital Market:

(a) Capital market facilitates large-scale nation-wide mobilization of savings

and financial resources.

(b) Capital market facilitates acceleration of capital formation.

(c) Capital market helps in procuring foreign capital for the quicker economic
development of a country.

(d) Capital market ensures effective allocation of the mobilized financial

resources among projects which yield highest returns or which contribute to
balanced economic development.

(e) It ensures ready and continuous market for long-term funds.

(f) An organized and well-developed capital market ensures best possible co-
ordination between the flow of savings and the flow of investment.

(g) It directs the flow of savings into most profitable channels, and thereby,
ensures the optimum utilization of financial resources.

(h) Capital market is a hand-maid to industry

(i) It makes available to industry sufficient amount of long-term capital at a

reasonable rate of interest,

(j) It also helps industries in securing foreign capital to promote industrial

and economic development in the country.

(i) It provides profitable investment opportunities to the small savers and

investors.

Classification of Capital Market or Types of Capital Market:

On the basis of the status of the market, the capital market in India is
classified into two types, viz., (a) organized capital market and (b)
unorganized capital market.

(a) Organized Capital Market:

The constituents of the organized capital market are the Reserve Bank of
India, financial institutions like IFCI, LIC, IDBI, U.T.I., commercial banks, stock
market, etc. The organized capital market is the most important component
of the capital market.

(b) Unorganized Capital Market:

The unorganized capital market consists of indigenous bankers, money

lenders, chit funds, etc. The unorganized capital market is very narrow. It
provides funds to small business units.

On the basis of stage of development, capital market is classified into two

types, viz., (a) primary capital market and (b) secondary capital market.

(a) Primary Capital Market or New Issues Market:

Meaning of Primary Capital Market:

Primary capital market is the market in which funds are raised by industrial
and commercial enterprises from investors through the issue of shares,
debentures and bonds. That means, this market is concerned with new
issues only.

Features of Primary Capital Market:

i) Primary capital market is concerned with long-term funds or capital.

(ii) In the primary capital market, securities are sold for the first time. It is for
this reason that the primary capital market is also known as new issues
market.

(iii) In the primary capital market, securities are issued by industrial and
commercial companies directly to investors.

(iv)Primary capital market promotes capital formation directly.

(v) The funds raised in the primary capital market are utilized by the issuing
companies for investment on fixed capital, i.e., fixed assets.

(vi) Primary capital market does not cover long-term loans from financial
institutions.

(b) Secondary Capital Market or Stock Exchange Market:

Meaning of Secondary Market:

Secondary market is the market which facilitates the transfer of ownership

(i.e., purchase and sale) of second-hand or existing securities between
investors. Secondary market is also known as stock exchange market,
because the purchase and sale of existing securities between investors are
made through stock exchanges. By facilitating purchase and sale of existing
securities, secondary market provides liquidity to existing securities.

Features of Secondary Capital Market or Stock Market:

(i) Secondary market is not the place of origin of the securities.

(ii) Secondary market deals in previously issued securities (i.e., existing

securities).

(iii) In the secondary market, securities are not directly issued by a company
to the investors. Securities are sold by an existing investor to another
investor.

(iv) In the secondary market, the securities are bought and sold by investors
through brokers.

(v) Secondary market does not directly contribute to capital formation.

(vi) Secondary market provides liquidity to securities, and thereby, increases

the marketability of securities.

Differences between Primary Capital Market or New Issues Market

and Secondary Capital Market or Stock Market:

(i) New issues of securities are dealt in primary market, whereas existing
securities (i.e., securities issued earlier) are dealt in secondary market.

(ii) In primary market, securities are exchanged between companies and

investors. But in secondary market, securities are exchanged between
investors.

(iii) Primary market promotes capital formation directly, whereas secondary

market promotes capital formation only indirectly.
(iv) In the primary market, securities are only bought by the investors from
companies, and they are not sold. On the other hand, in the secondary
market, securities are bought and sold.

(v) The prices of securities dealt in the primary market are determined by the
management of issuing companies. But the prices of securities dealt in the
secondary market are determined by the demand for and the supply of
securities.

(vi) In the primary market, securities are issued to investors for the first time,
whereas in the secondary market, securities can be bought and sold any
number of times.