Introduction:

The capital market is a platform where individuals or entities exchange long-term debt or securities backed by equity. This market consists of entities with available capital to invest or lend, examples being banks and investors. In India, the Securities Exchange Board of India (SEBI) oversees these activities.

Structure of the Capital Market in India

Types of Capital Markets

1. Primary Market: This market involves new issues where companies release shares via an Initial Public Offering (IPO) for the first time. Post-IPO, these shares get listed on stock exchanges. The funds raised are meant for the company's growth and expansion through means like private placement and rights issues.
2. Secondary Market: This is where listed securities are traded. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are dominant in India's equity market trades.

Instruments

The capital market includes instruments like:

1. Stocks: Represent company ownership, shares fluctuate in price based on market demand and supply. Shareholders gain dividends and have voting rights in meetings.
2. Bonds: These are debt instruments where companies raise funds by promising interest payments to bondholders, who get back their principal at maturity.
3. Exchange-Traded Funds (ETFs): These are pools of investors’ resources invested in varied capital market instruments including stocks and bonds.
4. Derivatives: Financial products deriving value from underlying commodities such as stocks and bonds.
5. Currency: Currency trading in foreign markets often involves agreements like spot, outright forwards, and swaps.

Intermediaries

• Brokers: Facilitate buying and selling of shares for a commission.
• Stock Exchanges: Platforms like NSE and BSE where securities are traded.
• Regulator: SEBI is responsible for regulating capital market activities in India.

Functions of the Capital Market

The capital market has several roles like:

1. Bridging savings from individuals to financial markets.
2. Enabling investors to gain profits commensurate with their risk levels.
3. Stabilizing stock prices and easing capital mobilization.
4. Ensuring ongoing funds availability via platforms like NSE and BSE, lowering information and transaction costs.
5. Promoting capital and share transfer through brokers and other intermediaries.

Features of the Capital Market

Notable features include:

1. Safety: Governed by regulations ensuring safe trading.
2. Channelizes Savings: Acts as a conduit between savers and investors, fostering economic growth.
3. Long-term Investment: Suitable for sustained investments in market instruments.
4. Wealth Creation: Opportunities for wealth growth through compounding with investments in stocks and bonds.
5. Intermediary Support: Assists in moving savings to borrowers, supporting intermediary roles like stock exchanges and brokers.

How Does it Work?

In entrepreneurial ventures, the reliance on short-term money market funds is often inadequate. Through capital markets, entities with excess funds invest for long-term returns. The primary market facilitates initial capital raising, further traded in the secondary market through intermediaries.

Advantages of the Capital Market

• Enables connections between fund suppliers and seekers.
• Enhances the efficiency of transactions.
• Investors earn dividends from shares.
• Investments in these markets usually appreciate over time.
• Bond interest rates often surpass bank offerings.
• Possibility of long-term capital gains from investing in the stock market.
• Use of capital market investments as collateral to secure bank loans.

Examples of the Capital Market

• Stock Market: A marketplace for buying and selling stock — representing company ownership.
• Bond Market: Involves issuing new debt or trading debt securities.
• Currency and Foreign Exchange Markets: Global, decentralized forums for trading currencies and setting exchange rates.

Difference between Capital Market and Money Market

Key differences include:

For further insights, refer to our article on Money Market vs Capital Market.