Capital Market

What is Capital Market?

A capital market is a system where savings and investments are mobilized by capital suppliers and consumers of such capital. Various entities buy or sell multiple financial instruments and products.

Functions of the Capital Market

  • The capital market is a platform for various kinds of savers and investors
  • Capital is used more productively and profitable for National building (from idle money (capital) put into use of building infrastructures, products, and services for the entire country)
  • Capital fuels the economic, industrial, and service sector growth
  • Multiple small savings by people used to create a long term financial investment
  • Trading of securities freely available for buyers and sellers
  • Valuation and ownership are created and freely transferable.
  • Hedging is possible by derivative products.
  • Funds available continuously

The capital market is the source of finance for companies and investment opportunities for investors.
Stocks (Equity securities) and Bonds (Debt Securities) of various companies are bought and sold by the investors and the general public in the capital market.

Other than the distinction between equity and debt, capital markets are also generally divided into two categories of markets:

1. Primary Market

The primary market is the new shares/paper issue market. It deals with the creation of new securities. Company issues equity shares to the public for the first time for raising capital resources is called Initial Public Offer (IPO). New shareholders will be able to participate in contributing to the capital of a company. The functions of the Primary Market are Origination, Underwriting, and Distribution of the share.

The shares were issued to the public through an initial public offer. Or the select group of investors in a private placement. A public proposal is open to three categories of investors:

  • Qualified institutional buyers (QIBs), Foreign Portfolio Investors (FPIs), Banks and financial institutions, Mutual funds, Insurance funds, Pension funds, and other kinds of institutional players
  • High net worth individuals, and non-institutional buyers (NIBs) who invest more than Rs. 2 lakhs
  • Retail individual investors (including eligible NRIs and HUFs up to Rs. 2 lakhs in an issue.

A primary market issuance can also issue to a defined group of investors or private placement. A private investment made by a listed company is called a Preferential Allotment. A preferential allotment made to identified Qualified Institutional Buyers (QIB) is called a Qualified Institutional Placement.

Such an offer for sale does not increase or decrease the share capital of the company.

2. Secondary Market

A secondary market is a place where trading takes place in the stock exchange or stock market for existing securities. Securities are bought and sold by investors in the secondary market or stock market. Functions of the secondary market are:

  • Essential company information flow that may affect its share price
  • Liquidity to the buyers and sellers
  • Continuous trading

The leading stock exchanges in India are the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and the Metropolitan Stock Exchange of India Ltd (MSEI).


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