What is the Capital Market?

The capital market is a financial platform for trading long-term debt and equity-backed securities. Participants include banks and investors who lend capital. In India, the Securities Exchange Board of India (SEBI) oversees the capital market.

Structure of the Capital Market in India

Types of Capital Markets

1. Primary market: Companies issue shares through an Initial Public Offering (IPO) here. Post-IPO, shares are listed on stock exchanges and the funds raised aid company growth.
2. Secondary market: This market involves trading listed stocks and securities. Major exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are hubs for such transactions.

Instruments

1. Stocks: Represent company ownership, trades occur on stock exchanges, and shareholders have voting rights and potential dividends.
2. Bonds: Debt securities for raising capital, offering interest to bondholders.
3. Exchange-Traded Funds (ETFs): Pooled investments in shares, bonds, and derivatives.
4. Derivatives: Value-driven from assets like currencies and bonds.
5. Currency: Includes spot, forwards, and swaps in foreign markets.

Intermediaries

1. Brokers: Facilitate buying and selling for commissions.
2. Stock Exchanges: Trading platforms like NSE and BSE.
3. Regulator: SEBI regulates and governs Indian capital markets.

Functions of the Capital Market

• Mobilizes savings, allocating resources effectively to economic growth channels.
• Facilitates risk-based profit opportunities.
• Stabilizes stock prices and mobilizes capital.
• Ensures continuous fund availability via NSE and BSE, reducing costs.
• Enables capital and share transfers through brokers and traders.

Features of the Capital Market

• Safety: Governed by strict regulations for secure trading.
• Capital flow: Channels savings into investments and economic growth.
• Long-term: Provides avenues for enduring investments.
• Wealth creation: Investments in shares and bonds compound wealth.
• Intermediaries: Supports intermediary activities for better business operations.

How Does it Work?

Businesses require long-term investments to generate revenue; capital markets allow entities with surplus funds to invest in securities in the primary market, later traded in the secondary market with intermediary assistance.

Advantages of the Capital Market

• Facilitates capital-provider interactions.
• Enhances transaction efficiency.
• Offer dividend earnings.
• Long-term investments often increase in value.
• Higher bond interest rates than bank offerings.
• Potential long-term capital gains in stock investments.
• Collateral use for securing bank loans.

Examples of the Capital Market

• Stock Market: The equity market for buying/selling business ownership claims.
• Bond Market: Platform for issuing and trading debt securities.
• Currency and Forex Markets: Global decentralized currency trading and exchange rate determinations.

Difference between Capital Market and Money Market

Criteria	Capital Market	Money Market
Purpose	Becomes part of asset base	Covers short-term needs
Function	Long-term credit	Short-term credit
Nature	Formal and regulated	Informal
Classification	Primary and Secondary	No subdivision
Instruments	Bonds, Stocks	T-Bills, CDs

Further insights are available in our detailed article comparing Money Market vs Capital Market.