CAPITAL
MARKET
By,
S. GAYATHRI
2ND M. Com(A&F)

Meaning of Capital Market
 A Market in which individuals and institutions trade
financial securities. Organisations/institutions in
the public and private sectors also often sell
securities on the capital market in order to raise
funds.
 Capital markets are Financial markets for the
buying and selling of long term debt and equity
backed securities.
 Capital Market is where trading in financial
instruments is conducted to raise capital

Three categories of Capital
Market
 Issuer of securities: Borrowers or deficit savers
who issue securities to raise funds( corporate
sectors and central government).
 Investors: Surplus savers who deploy savings by
subscribing these securities(include retail
investors and mutual funds).
 The Intermediaries: Agents who match the need
of users and suppliers of funds.

Nature of Capital Market
 It has two segments primary and secondary
market.
 It performs trade-off function.
 It deals in long term securities.
 It helps in creating securities.
 It creates dispersion in business ownership.
 It helps in capital function.

Role and Function of Capital
Market
 Capital formation
 Avenue provision of investment.
 Speed up Economic growth and
Devolopment.
 Mobilisation of savings
 Proper Regulation of Funds
 Service Provision
 Continous Availability of Funds

Characteristics of Capital Market
 The main characteristics of capital market:
 Connects savers and entrepreneurial
borrowers:
The capital market links savers with the
borrowers of funds. It routes money from savers to
entrepreneurial borrowers.
 Deals in medium and long-term investments:
Capital Market is a market for medium and
long-term financial instruments.

Contd…
 It helps in rasing long-term funds. Through
this market, Corporates, Industrial
organisations, financial institutions and so on
get access to long-term funds from both
domestic and foreign markets.
 Capital Market doesn’t deal with short-term
financial instruments linke Banker’s
Acceptance, Certificate of deposits and
commercial paper.

 Presence of Intermediaries:
Capital Market operates with the help
of intermediaries like brokers, underwriters,
merchant bankers, sub-brokers, collection
bankers and so on. These intermediaries are
important element of a capital market.

 Determinant of rate of capital formation:
Capital Market is a determinant of the
rate capital formation in an economy as it mobilizes
funds. Capital formation is the net addition to the
existing stock of an economy’s capital .
 Variety of Investors:
Capital Market has a wide variety of
investors. It comprises both individuals like general
public and institutional investors like mutual funds,
LIC, and so on.

 Deals in marketable and non-marketable
securities:
Capital market trades in both
marketable and non-marketable securities.
Marketable securities are securities that can be
transferred e.g. shares, debentures, and so on.
On the other hand, non-marketable securities
are those which cannot be transferred e.g. Term
Deposits, Loans and advances.

Capital markets are regulated by
government rules and regulations:
Capital Market operates freely. However,
it is regulated by government rules, regulation
and policies. For example, BSE and NSE are
regulated by SEBI, A government body.

 Provides Liquidity:
Capital Market instruments are liquid.
Investors can sell securities as and when
needed and get cash.
 Foreign Investors:
Foreign investors, both individuals
and institutions, and Non-Resident indians can
also invest in the Indian securities market.

 Over-the counter market:
An over-the-counter (OTC) are
financial instruments like currencies and stocks
which are traded directly between two parties.

Structures of Capital Market
 Government Securities Market:
This is also known as the Gilt-edged
market. This refers to the market for government
and semi-government securities backed by the
Reserve Bank of India.
 Industrial Securities Market:
This is a market for industrial securities
I.e.market for shares and debenturesof the existing
and new corporates firms. Buying and selling of
such instruments take place in this market.

Contd…
This market is further classified into two types such
as the New Issues Market(Primary), and the old
issues market (secondary).
In primary market, fresh capital is raised by
companies by issuing new shares, bonds, unit of
mutual funds and debentures.
However in secondary market, already existing
i.e.old shares and debentures are traded.

 Devolopment Financial Institutions(DFIs):
DFIs is the another segment of
Indian Capital market. This comprises various
financial institutions. These can be special
purpose institutions like IFCI, ICICI, SFCs, IDBI,
IIBI, UTI, etc… These financial institutions
provide long-term finance for those purposes for
which they are set up.

 Financial Intermediaries:
The fourth important segment of the
indian capital market is the financial
intermediaries. This comprises various
merchant banking institutions, mutual funds,
leasing finance companies and other financial
institutions.

Players of capital market
 Key players in the primary market:
Corporation: a corporation is a legal entity
that is seperated and distinct from its owners. It
is usually a group of people or entities
authorized to act as a single entity. Corporations
enjoy most of the rights and responsibilities that
individuals possess, enter contracts, offer loan
and borrow money, hire employees, own assets
and pay taxes.

 Institution: Institutionsin capital market
consist of the fund managers, institutional
investors and retail investors. The investors
provide funds needed by the corporations for
the growth of businesses. The fund is raised
by these investors in the form of bond and
shares.

 Investment bankers:
The role of investment banks is to
guide their clients in making the right decisions
and finalising right deals so that they face
minimum loss. Investment banks in India also
advice their clients to buy back their shares
from the market at the right time and offer
advisory services to big companies and
corporate bodies.

 Public Accounting Firms:
Public accounting firms refers to
business that provides accounting services to
other firms. Public accountants provide
accounting expertise, auditingand tax servicies
to their clients. This can include the handling of
many accounting functions on an outsourced
basis.

Key players in the secondary
market
 Buyers and sellers:
The buyers and sellers transact on
an exchange in the secondary market. In the
secondary market, fund managers or any
investors who wish to purchase securities or
debts will have to locate seller. Transactions are
facilitated through a central market place,
including a stock exchange or Over the
Counter(OTC).

 Invesment Banks:
The investment banks are
specialised in the field of debt and equity
research and they work closely with traders and
security sales personnel to determine the
approximate prices of securities in the current
market situation. They expedite the sales and
trading of issued debts and equities between
buyers and sellers in the secondary market.