Capital Market- Types, Functions, Participants


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What is Capital Market

A capital market is where funding instruments may be traded, including shares, bonds, debentures, debt securities, and ETFs.

It is a way to raise money for private citizens, businesses, and governments. The assets traded here are primarily long-term investments with lock-in periods of at least a year.

On the other side, the money market is often where one may find short-term investments. The market is essential to the growth of the economy. Funds are mobilized from individuals, banks, financial institutions, real estate, and gold, redirecting savings from wasteful to proper channels.

The primary sources of capital in the market include commercial banks, financial institutions, individual investors, insurance companies, businesses, and retirement funds.

Types/ segments of Capital Market

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  1. Primary Market

There is a primary market for newly issued securities or first-time trading. It makes it possible for an IPO. The new issues market is another name for it.

Preferential allocation, rights issues, electronic IPOs, the pre-selected issuing of securities, and private placements are used here to assist corporations in generating money. Like an investment bank, the intermediary often gives the shares an initial price. Once the transaction is completed, companies transfer their shares to the stock exchange to enable trading among other investors.

In short, The primary market is where new shares or securities are traded. In a primary market, a business will issue new securities in return for money from investors (buyers). It relates to trading recently issued stocks and other assets made available to investors.

  1. Secondary Market

After transactions in the primary market, old securities are traded in the secondary market. The secondary market includes both stock markets and bond market transactions. This market is also known as the stock market or the aftermarket.

The National Stock Exchange, Bombay Stock Exchange, etc., are a few examples of secondary markets.

Functions/ Importance of Capital Market

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The capital market is crucial in mobilizing savings and directing them toward profitable investments for the growth of business and industry. As a result, the capital market aids the nation's capital formation and economic expansion. The function of the capital market is discussed below.

  1. Capital Formation

The capital market takes great satisfaction in providing savings enthusiasts with incentives in the form of interest or dividends to move their excess funds into the deficit units that will invest them in various enterprises. Capital formation results from the movement of funds from the surplus units to the deficit units.

  1. Increase the national income

Money from people and financial intermediaries enters the capital market and is absorbed by businesses, industries, and the government. Thus, it makes it easier for the flow of money to be utilized more profitably and productively, thereby raising the country's income.

  1. Accelerating the pace of growth

Entrepreneurs are encouraged to start profitable projects or businesses in trade, industry, commerce, and even agriculture by capital's easy and seamless availability for medium and long periods. It causes an overall increase in the economy and accelerates the process of economic growth.

  1. The link between savers and investors

The capital market serves as a crucial channel between investors and savers. Investors are money borrowers, whereas savers are money lenders. The investors/borrowers are referred to as "deficit units," whereas the savers who do not spend their whole income are referred to as "surplus units." The transmission system between surplus and deficit units is the capital market. It serves as a channel for lending surplus cash from surplus units to deficit units.

  1. Basis for industrialization

Long-term funds are produced by the capital market and are crucial for the development of industries. As a result, the basis for industrialization is the capital market.

  1. Encourages economic growth

The capital market facilitates economic growth. The many institutions that operate on the capital market provide the flow of funds with quantitative and qualitative direction and a sensible distribution of resources. They do this by transforming financial assets into useful physical assets.

This results in the rise of industry and commerce in both the public and private sectors, which promotes or causes economic growth.

  1. Productive Investment

The capital market offers a means for those with resources to lend to people who need money for profitable investments. It shifts funds away from inefficient and useless channels, such as gold, jewelry, showy purchases, etc., and toward profitable ventures.

  1. Generating Liquidity

Being able to be converted into cash is liquidity. Shares of public companies are transferrable, meaning that in the event of a financial emergency, the shares can be sold on the stock market for cash. The capital market produces liquidity in this way.

  1. Stabilization of the value of securities

The value of stocks and securities is stable when there is a well-developed capital market with competent non-banking and banking intermediaries. It accomplishes this by lending money to those in need at fair interest rates and reducing speculative activity.

Participants of Capital Market

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  1. Investors

Owners of stock in a public company are referred to as investors, stockholders, or shareholders. They are granted several advantages, including the right to fair and equitable treatment, the ability to vote, exercise associated rights and earn dividends and other benefits owed to shareholders. 

  1. Transfer Agents

The stock transfer agent officially keeps the corporate shareholder records. The stock transfer agents provide a list of the holders of the issuer's securities to the issuer or the listed firm. They handle corporate acts such as stock or cash dividends, stock rights, share options, the gathering of proxy forms, and the transfer of beneficial ownership.

  1. Stock Exchanges

A stock exchange is a regulated marketplace or establishment that connects buyers and sellers and makes buying and selling equities easier. It ensures that trading transactions are carried out effectively, efficiently, fairly, and transparently. It actively enforces the laws and guidelines its public companies, firms, and trading participants must follow. The National Stock Exchange, for example, carries out its responsibility as the "guardian" of the Indian stock market in this manner.

  1. Stockbrokers

A stockbroker or trading participant can trade at the Exchange if they hold a Securities and Exchange Commission (SEC) license. They serve as a middleman between market participants buying and selling equities. They get either a purchasing commission or a selling commission from their customers in exchange for their stockbroking services.

On the "trading floor" of the exchange, the representatives (licensed salespeople) of these qualified stockbrokers meet each day at predetermined times, where they purchase and sell shares of stocks on behalf of their clients. By purchasing at the lowest price or selling at the highest price, they carry out orders in the market to the best benefit of their clients.

  1. Listed Companies

Firms with shares of stock traded on the Exchange are referred to as "issuers" or "listed companies." These businesses had an initial public offering (IPO) or a listing using an introduction to meet the stock exchange's strict listing and reportorial criteria.

  1. Clearing House

A clearing house is one of the Stock Exchange's wholly owned subsidiaries. It was created to ensure stock deals completed at the Exchange were settled promptly. The clearinghouse is in charge of determining the following:

  • The obligations and rights of its clearing members about cash and securities, synchronizing the transfer of funds and securities based on the delivery-versus-payment model or multilateral net settlement.

  • Guaranteeing the settlement of trades in the event of a trading participant's trade default to ensure the finality and irrevocability of all Exchange trades through its failed management procedures and implementing suitable risk management.

  1. Depository

When listed shares of stock are exchanged at the exchange, the depository serves as the securities depository, or "custodian," of such shares. It was set up to enable scripless trading and establish a central repository in India.

When transferring securities, the depository conducts book-entry accounting during the settlement of Exchange deals from the seller and buyer accounts.

  1. Settlement Banks

The settlement banks accept deposits of funds for the purchase of securities, confirm payments of outstanding clearing obligations, debit the buyer's and seller's cash accounts during settlement, and receive and return the cash collateral that clearing members have posted to cover their daily trade negative exposures.

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