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Capital markets

Capital markets

  • Capital markets are the  financial market for the buying and selling of long-term debt or equity -backed securities.
  • These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies/ governments making long-term investments. Capital markets are defined as markets in which money is provided for periods longer than a year.
  • Capital market instruments used for market trade include stocks and bonds, treasury bills, foreign exchange, fixed deposits, debentures, etc. As they involve debts and equity securities, the instruments are also called securities, and the market is referred to as securities market.
This market helps the investors in the following ways:
  • It ensures the marketability of investments,
  • By advertising security prices, the Stock Exchange enables the investors to keep track of their investments and channelize them into most profitable lines,
  • It safeguards the interests of the investors by compensating them from the Stock Exchange Compensating Fund in the event of fraud and default.

Features:

The capital market has the following features:
Link between Savers and Investment Opportunities:Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to entrepreneurial borrowers.
Deals in Long Term Investment:
Capital market provides funds for long and medium term. It does not deal with channelizing saving for less than one year.
Utilizes Intermediaries:Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of capital market and are very important elements of the capital market.
Determinant of Capital Formation:
The activities of the  capital market determine the rate of capital formation in an economy. Capital market offers attractive opportunities to those who have surplus funds so that they invest more and more in capital market and are encouraged to save more for profitable opportunities.
Government Rules and Regulations:
The capital market operates freely but under the guidance of government policies. These markets function within the framework of government rules and regulations.
ROLE OF CAPITAL MARKET:
  • The primary role of the capital market is to raise long-term funds for governments, banks, and corporations while providing a platform for the trading of securities.
    The member organizations of the capital market may issue stocks and bonds in order to raise funds.
  • Investors can then invest in the capital market by purchasing those stocks and bonds. The capital market, however, is not without risk.
  • It is important for investors to understand market trends before fully investing in the capital market. To that end, there are various market indices available to investors that reflect the present performance of the market.
CAPITAL MARKET RISK:
  • The capital market risk usually defines the risk involved in the investments. The stark potential of experiencing losses following a fluctuation in security prices is the reason behind the capital market risk. The capital market risk cannot be diversified.
  • The capital market risk can also be referred to as the capital market Systematic Risk. While an individual is investing in a security, the risk and return cannot be separated. The risk is the integrated part of the investment. The higher the potential of return, the higher is the risk associated with it.