A Capital Market is a financial market where buyers and sellers engage in trade of financial securities like equities, debentures, bonds, etc. for long-run investment. Long run investments refer to those investments whose lock-in period is more than one year.
Capital market and Money market are performed in the same functions. It plays an intermediate role between the investors and the wealth creators. The funds will help to create wealth in the economy in the long run.
The organizations that have capital include retail and institutional investors while those who seek capital are people, government and business, etc. Capital market protects investors against fraud, among other duties.
In the capital market, transactions between both parties are done by underwriter or brokers called underwrites who charge some commission of their services from both parties.
Functions of Capital Market
- To activate the ideal monetary resources and puts them in proper investments.
- To mobilize funds from people for further investments in the long run in the productive channels of an economy.
- To help in increasing capital formation.
- To provide a suitable return on investments to the investors who want to invest in the long run.
- To increase production and productivity in our monetary system by the generation of employment and development of infrastructure.
- It is more liquidity in nature where the seller can sell its securities easily and the buyer can buy securities with the help of a broker or underwriter.
Types of Capital Market
Capital market is classified into two categories:
- Primary Market
- Secondary Market
The primary market is the market where first time fresh securities are directly issued to investors or the public by the issuer. IPO (Initial public offer) is the best example of a primary market.
Primary markets are facilitated by underwriting groups consisting of investment banks that set a beginning price range for a given security and oversee its sale to investors.
In the primary market government, companies and public sector institutions are raising funds through issue bonds and corporations raise funds by issuing fresh shares through IPO.
Where the initial sale by the primary market is complete, further trading is performed on the secondary market, where trading is in the bulk area.
The secondary market is the market where investors are dealing with in their existing securities which are previously issued in the primary market. Once the IPO is done and the stock is listed, they are traded in the secondary market. Prices are decided in the secondary market by demand and supply of securities.
The secondary market consists of both equity as well as debts markets. It is a better platform for investors to deal with securities and raised their funds.
The secondary market helps measure the economic condition of a country. The rise or fall in share prices indicates a boom or recession cycle in an economy.
The secondary market promotes economic efficiency. Each sale of security involves a seller who values the security less than the price and a buyer who values the security more than the price.
The main difference between the two is that in the primary market, an investor gets securities directly from the company through IPOs, while in the secondary market, one purchases securities from other investors willing to sell the same.