Financial Awareness Level
What Is Capital Market? Meaning, Types, Functions, and Importance Explained
Introduction
The capital market plays a vital role in the economic development of any country. It provides a platform for individuals, companies, and governments to raise long-term funds and invest in productive activities. In this blog, we explain what a capital market is, its types, key features, functions, and its importance in the Indian financial ecosystem.
What Is Capital Market?
A capital market is a financial market where buyers and sellers trade long-term financial instruments like stocks, bonds, debentures, and other securities. It facilitates the movement of capital from savers to businesses or institutions that need funds for long-term investments.
Definition:
The capital market is a marketplace that enables the efficient allocation of long-term funds and includes both primary and secondary markets.
Types of Capital Market
1. Primary Market
- Also known as the new issue market
- Where companies raise funds by issuing new shares, debentures, or bonds to investors
- Example: Initial Public Offering (IPO), Rights Issue
2. Secondary Market
- Also known as the stock market or aftermarket
- Where existing securities are traded among investors
- Example: Trading of shares on NSE or BSE
Functions of Capital Market
1. Mobilization of Savings
- Attracts savings from individuals and institutions and channels them into productive uses
2. Capital Formation
- Facilitates creation of new capital assets through investment in long-term projects
3. Liquidity for Investors
- Allows investors to convert their securities into cash easily via secondary markets
4. Price Discovery
- Determines fair market value of securities through supply and demand
5. Risk Diversification
- Offers a variety of financial instruments for investors to diversify their portfolios
6. Efficient Allocation of Resources
- Funds are directed towards businesses/projects with better returns.
Features of Capital Market
- Long-Term Focus: Deals in instruments with maturity periods of more than one year
- Regulated by SEBI: Ensures transparency and investor protection in India
- Wide Participant Base: Includes retail investors, institutional investors, foreign investors
- Variety of Instruments: Equity shares, preference shares, debentures, bonds, etc.
- Market-Driven Pricing: Securities priced through market dynamics
Importance of Capital Market in India
1. Economic Growth
- Supports industrial development and infrastructure expansion
2. Encourages Investment
- Offers opportunities for individuals to invest and grow wealth
3. Funding Source for Enterprises
- Provides businesses with capital for expansion, R&D, and innovation
4. Improves Corporate Governance
- Listed companies must comply with disclosure norms, improving transparency
5. Employment Generation
- Investment-led business growth creates jobs across sectors
6. Global Integration
- Enables foreign capital inflows through FPI and FDI participation
Mutual Fund schemes and capital markets are intricately connected, with mutual fund schemes serving as a one of the channels for individual and institutional investments into the capital markets.
A mutual fund is a pool of money managed by a professional Fund Manager. A mutual fund is a collective investment vehicle that collects & pools money from a number of investors and invests the same in equities, bonds, government securities, money market instruments.
It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV.
Mutual Funds offer various avenues to fulfill different objectives, which investors can choose from based on one’s unique situation and objective.
Conclusion
The capital market is a critical pillar of India’s financial system, bridging the gap between investors and enterprises. Whether through IPOs in the primary market or daily trading in the secondary market, it fuels capital formation, economic growth, and wealth creation. For both new and seasoned investors, understanding how the capital market functions is key to informed investment decisions.
Additional links:
What is a Mutual Fund? - Beginner's Guide to Investing
AMFI - Introduction to Mutual Funds
FAQ Section
What is the capital market in simple terms?
It's a market where long-term securities like shares and bonds are bought and sold.
What are the two main types of capital markets?
The primary market (new issues) and the secondary market (existing securities).
Who regulates the capital market in India?
SEBI (Securities and Exchange Board of India) is the main regulatory authority.
How is capital market different from money market?
Capital market deals in long-term instruments; money market deals in short-term instruments. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)
What is the role of the stock exchange in capital market?
Stock exchanges like NSE and BSE facilitate trading of securities in the secondary market.
What is capital formation?
The process of converting savings into investments that create productive assets.
Can individuals participate in the capital market?
Yes, through Demat accounts and trading platforms.
What are examples of capital market instruments?
Equity shares, debentures, corporate bonds, government securities, mutual fund schemes and preference shares. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)
Is the capital market risky?
It involves market risk, but diversified portfolios and long-term strategies can reduce volatility. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)
Why is capital market important for investors?
It offers investment opportunities, liquidity, and potential for long-term wealth creation.
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An Investor Education And Awareness Initiative
Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. If they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.sebi.gov.in/scores-home/. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
