Capital Market Meaning, Features, Types

Capital Market Meaning, Features, Types

Investing in Stock Market

Capital Market Meaning

Capital Market is generally understood as the market for long-term funds. This market supplies funds for financing the fixed capital requirement of trade and commerce as well as the long-term requirements of the Government. The long-term funds are made available through various instruments such as debentures, preference shares, and common shares. The capital market can be local, regional, national, or international. The capital market is classified into two categories, namely,

  • Primary market or new issue market, and
  • Secondary market or stock exchange.

Capital Market Features

1. Dealing in Securities: It deals in many types of financial instruments. These include equity shares, preference shares, debentures, bonds, etc. These are known as securities. It is for this reason that capital market is known as ‘Securities Market’.

2. Segments: It included both primary and secondary market. Primary market is meant for issue of fresh shares and secondary market facilitates buying and selling of second hand securities.

3. Investors: It includes both individual investors and institutional investors such as Mutual funds, banks, Insurance companies etc. It also includes foreign institutional investors.

4. Link between savers and investment opportunities: Capital market is a crucial link between saving and investment process. It facilitates flow of long term capital from those who have surplus capital to those who need capital.

5. Participants of capital market: The constituents (players) in the capital market include individuals and institutions. They include individual investors, investment and trust companies, banks, stock exchanges, specialized financial institutions etc.

6. Intermediaries: It acts through intermediaries which includes bankers, brokers, underwriters etc.

7. Government rules and regulations: The capital market operates freely but under the guidance of government policies. These market functions within the framework of government rules and regulations.

Capital Market Types

Primary Market (New Issue Market)

Primary market which is also called new issue market represents a market where new securities i.e. shares, debentures and bonds that have never been previously issued are offered. It is a market of fresh capital. The primary market is the entry market for companies and investors, where a company or institution that requires initial or additional capital sells its shares or financial instrument to the investors. For example, Initial Public Offering (IPO), public offer, rights issue and bond issue are done on the primary market. The primary market is also unique that the initial buyer is the only person who can exchange the securities for funds. When companies are willing to go for publicly listed on the stock exchange and wants to collect funds from general investors, they first sell their financial instrument in the primary market. Primary market is the first place for trading financial instruments including stocks and bonds.

There exist two types of primary market:

  1. Market where firms issue securities for the first time through Initial Public Offer (IPO).
  2. Market where firms which are already trading in secondary market raise additional capital through Seasoned Equity Offering (SEO).

Secondary market or stock exchange

Secondary market also called stock exchange represents a market where existing securities i.e. shares and debentures are traded. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest and cheapest manner.

According to Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as, “an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

Thus, a stock market is a market where dealings in the listed securities are made by the members of the exchange on their own behalf or on behalf of others.