The Capital Market

What is Capital Market

The capital market is a market for securities, where companies and governments can raise long term funds.
It is a market in which money is lent for periods longer than a year (in contrast to money markets where it is lent for less than a year). 

The capital market includes 

  • the stock market
  • the bond market. 

Financial regulators, such as India's Securities and Exchange Board of India (SEBI) oversee the capital markets to ensure that investors are protected against fraud.
The capital markets consist of 

  • the primary market
  • the secondary market. 

The primary markets are where new stock and bonds issues are sold (underwritten) to investors. The secondary markets are where existing securities are sold and bought from one investor or speculator to another, usually in an exchange (e.g. BSE Ltd.).

Need for Capital Market

Capital market plays an extremely important role in promoting and sustaining the growth of an economy. 

  • It is an important and efficient conduit to channel and mobilize funds to enterprises, both private and government
  • It provides an effective source of investment in the economy.
  • It plays a critical role in mobilizing savings for investment in productive assets, with a view to enhancing a country's long-term growth prospects, and thus acts as a major catalyst in transforming the economy into a more efficient, innovative and competitive marketplace within the global arena.
  • In addition to resource allocation, capital markets also provide a medium for risk management by allowing the diversification of risk in the economy.
  • A well-functioning capital market tends to improve information quality as it plays a major role in encouraging the adoption of stronger corporate governance principles, thus supporting a trading environment, which is founded on integrity.
  • Capital market has played a crucial role in supporting periods of technological progress and economic development throughout history.
  • Among other things, liquid markets make it possible to obtain financing for capital-intensive projects with long gestation periods. This certainly held true during the industrial revolution in the 18th century and continues to apply even as we move towards the so-called "New Economy".
  • Capital markets make it possible for companies to give shares to their employees via ESOPs
  • Capital markets provide a currency for acquisitions via share swaps
  • Capital markets provide an excellent route for disinvestments to take place
  • Venture Capital and Private Equity funds investing in unlisted companies get an exit option when the company gets listed on the capital markets

The existence of deep and broad capital market is absolutely crucial in spurring the growth our country. An essential imperative for India has been to develop its capital market to provide alternative sources of funding for companies and in doing so, achieve more effective mobilisation of investors' savings. Capital market also provides a valuable source of external finance.

For a long time, the Indian market was considered too small to warrant much attention. However, this view has changed rapidly as vast amounts of both international and domestic investment have poured into our markets over the last decade. The Indian market is no longer viewed as a static universe but as a constantly evolving one providing attractive opportunities to the investing community.