February 10, 2012

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What are Capital Markets?

In my previous article, I have explained how Capital Markets are a subset of the Financial Markets. You can read about it here: What are Financial Markets? Capital Markets: Slice of the financial markets that deal with medium/long term financial instruments (eg. Bonds, equities) It deals with funds having long maturity (more than a year) or an indefinite maturity. Transactions take place formally over stock exchanges with the help of brokers unlike money markets wherein transactions take place oral without help of brokers. Basic Role: To transfer funds from those who have surplus and make available funds to those who are running a deficit. They deal in both debt and equity. It constitutes of financial institutions like UTI, ICICI, LIC that play role of lenders whereas business units/corporate are the borrowers. It can be further classified into Primary and Secondary Markets. Primary Market: Newly issued stocks/bonds are traded. Secondary Market (Stock Markets): Trade of existing stocks/bonds takes place.

Importance/Significance/Role/Functions of Capital Market: Promote Savings/ Investments: By providing investment avenues to park savings, Capital Markets promote savings/investment in an economy.

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Efficient Link between Savers and Investors: It mobilizes idle savings for further investments in productive channels of economy. Encourage Economic Growth/Development: The proper allocation of resources results in the expansion of trade and industry in both public and private sectors, thus promoting balanced economic growth in the country. Stability in Security Prices: The capital markets bring stability in the values of stocks/securities and try to bring down the fluctuations in the prices to the bare minimum. The process of stabilization is assisted by making available capital to the borrowers at a lower interest rate and lessening the speculative and unproductive activities. Benefits to Investors: The Capital market helps the investors, i.e., those who have funds to invest in long-term financial instruments, in following ways: It brings together the buyers and sellers of securities and thereby makes possible the marketability of investments, By advertising security prices, the Stock Exchange helps the investors to keep track of their investments and channelize them into most profitable lines It protects the interests of the investors by compensating them from the Stock Exchange Compensating Fund in case of any fraud/default.

How are Capital Markets different from Money Markets?

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Constituents/Components of Capital Markets:

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