Capital Market: An Overview

The capital market is a financial market where financial assets are created and exchanged. It encompasses various financial transactions, including the initial issuance of shares and debentures by businesses and the purchase and sale of existing financial assets like bonds, debentures, and equity shares.

Subdivisions of the Financial Market

The financial market is divided into two main categories: the capital market and the money market. The capital market deals with medium and long-term funds, while the money market deals with short-term funds.

Capital Market Divisions

The capital market is further divided into the primary market and the secondary market. The primary market is where new securities are issued and sold for the first time, while the secondary market is where existing securities are traded between investors.

Capital Market Instruments

The capital market involves various instruments, including bonds, shares, and debentures. Bonds are debt instruments issued by governments and corporations to raise funds. Shares represent ownership in a company and provide investors with a share of the company’s profits. Debentures are long-term debt instruments issued by companies and are not backed by any collateral.

Importance of Capital Markets

Capital markets play a crucial role in the economy by facilitating the flow of funds from investors to businesses and governments. They provide businesses with the necessary capital to expand and innovate, while investors have the opportunity to earn returns on their investments.

The capital market is a vital component of the financial system and plays a key role in economic growth and development. It offers a platform for businesses to raise capital and for investors to invest their savings, contributing to the overall efficiency and stability of the economy.

Capital Market vs. Money Market

Capital Market

• Long-term debt or equity-backed securities are traded.
• Instruments: shares, bonds, government securities.
• Participants: stockbrokers, underwriters, mutual funds, financial institutions, individual investors.
• Formal in nature.
• Comparatively less liquid.
• Riskier than money market.
• Longer maturity duration.
• Helps achieve long-term credit requirements of businesses.
• High ROI involved.

Money Market

• Very short-term debt investment trading.
• Instruments: treasury bills, commercial papers, certificate of deposits, bills of exchange.
• Participants: commercial banks, non-banking finance companies, chit funds, etc.
• Informal in nature.
• Highly liquid.
• Minimum risks involved.
• Maturity within a year.
• Helps achieve short-term credit requirements of businesses.
• Comparatively lesser ROI involved.

Regulators of Capital Market

The Ministry of Finance oversees and regulates the capital markets in India. The two main regulators, the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), are responsible for ensuring the smooth functioning of the capital market.

The Ministry of Finance regulates the capital market through the Department of Economic Affairs – Capital Markets Division. This division is responsible for:

• Institutional reforms in the securities markets
• Building regulatory and market institutions
• Strengthening investor protection mechanisms
• Providing an efficient legislative framework for securities markets

Capital Market

The capital market is a financial market where long-term debt and equity securities are traded. It is a crucial component of the modern economy, facilitating the flow of funds from investors to businesses and governments.

Participants The capital market involves two primary entities:

• Capital Suppliers: These are individuals or institutions with surplus capital, such as pension funds, life insurance companies, non-financial companies, and charitable funds.

• Capital Seekers: These are individuals, governments, and businesses that require capital for various purposes, such as purchasing homes, vehicles, infrastructure development, or business expansion.

Functions of Capital Markets The capital market performs several essential functions in the economy:

• Intermediation: The capital market brings together capital suppliers and capital seekers, enabling the efficient allocation of funds.

• Transaction Efficiency: It aims to achieve better transactional efficiency by providing a platform for trading securities in a transparent and regulated manner.

• Economic Growth: The capital market contributes to economic growth by facilitating investment and capital formation.

• Continuous Availability of Funds: It ensures a continuous supply of funds to businesses and governments, supporting their growth and development.

• Efficient Capital Utilization: The capital market promotes the efficient movement and utilization of capital, leading to increased national income.

• Cost Minimization: It helps minimize transaction and information costs associated with raising capital.

• Risk Management: The capital market offers insurance against market risks through various financial instruments, such as derivatives.

Advantages of Capital Market

Participating in the capital market offers several advantages:

• Investment Opportunities: The capital market provides a wide range of investment opportunities, allowing investors to diversify their portfolios and potentially earn higher returns.

• Capital Formation: It facilitates capital formation by enabling businesses to raise funds for expansion and growth.

• Economic Development: The capital market contributes to economic development by channeling funds to productive sectors of the economy.

• Risk Sharing: It allows investors to share the risks associated with investing in securities.

• Liquidity: The capital market provides liquidity to investors, enabling them to easily buy and sell securities.

• Transparency and Regulation: The capital market is subject to regulations and oversight, ensuring transparency and protecting investors’ interests.

In conclusion, the capital market plays a vital role in the economy by facilitating the flow of funds, promoting economic growth, and providing investment opportunities. It brings together capital suppliers and capital seekers, enabling efficient capital allocation and risk management.

Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the process by which a previously unlisted company sells new or existing securities to the public for the first time. Here are some key points about IPOs:

• Going public: An IPO allows a private company to go public by selling its stocks to the general public.
• New or old firms: The company undergoing an IPO can be a new, young company or an established firm that decides to list its shares on an exchange.
• Raising capital: Companies can raise equity capital through an IPO by issuing new shares to the public. Alternatively, existing shareholders may sell their shares to the public without the company raising fresh capital.
• No obligation to repay: Unlike loans, companies offering their shares through an IPO are not obligated to repay the capital to public investors.
• Issuer and investment banks: The company offering its shares is known as the “issuer” and typically works with investment banking institutions to facilitate the IPO process.
• Trading after IPO: After the IPO, the company’s shares are traded in an open market, allowing investors to buy and sell them.

Stock Exchange

A stock exchange is a platform that facilitates the buying and selling of existing securities, primarily in the form of shares and debentures. Here are some key points about stock exchanges:

• Trading platform: A stock exchange provides a marketplace where investors can trade securities, converting them into money and vice versa.
• Legal definition: As per the Securities Contracts (Regulation) Act 1956, a stock exchange is defined as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating, or controlling the business of buying, selling, or dealing in securities.

National Stock Exchange (NSE)

• Modern and technology-driven: The NSE is a cutting-edge stock exchange that leverages technology to facilitate trading.
• Establishment and recognition: Incorporated in 1992 and recognized as a stock exchange in April 1993, the NSE commenced operations in 1994.
• Automated trading system: The NSE has implemented a nationwide, fully automated screen-based trading system.
• Global recognition: According to the World Federation of Exchanges (WFE), the NSE is the leading stock exchange in India and the second largest in the world by the number of trades in equity shares from January to June 2018.
• Leadership: Mr. Vikram Limaye serves as the Managing Director and CEO of the NSE.

Bombay Stock Exchange (BSE)

• Historic establishment: The Bombay Stock Exchange Ltd. was established in 1875, making it Asia’s first stock exchange.
• Legal recognition: The BSE was granted permanent recognition under the Securities Contract (Regulation) Act, 1956.

The Bombay Stock Exchange (BSE)

The BSE, formerly known as the Native Share Stock Brokers Association, was established in 1875 and became India’s first listed stock exchange in 2017. It has played a crucial role in the growth of the corporate sector by providing a platform for raising capital. The BSE launched India INX, India’s first international exchange, located at GIFT City IFSC, Ahmedabad. With approximately 5000 listed companies from across the country and beyond, the BSE stands as the largest market capitalization platform in India. Mr. Ashish Kumar Chauhan serves as the Managing Director and CEO of the BSE.

Stock Market in India – Facts

• The first stock exchange in India was established in 1875 in Bombay as the Native Share & Stock Brokers Association.
• Today, it is known as the BSE (Bombay Stock Exchange).
• Other exchanges followed in Ahmedabad (1894), Calcutta (1908), and Madras (1937).
• Until the early 1990s, the Indian secondary market comprised regional stock exchanges, with the BSE leading the list.
• After the reforms of 1991, the Indian secondary market acquired a three-tier form:
  • Regional Stock Exchanges
  • National Stock Exchange (NSE)
  • Over the Counter Exchange of India (OTCEI)

Important Terms in Capital Market

Demat Account

• A demat account is used to hold shares and securities in electronic format.
• It holds all investments in shares, government securities, bonds, mutual funds, etc., in one place.
• In India, free demat account services are offered by depositories such as NSDL and CDSL through intermediaries/depository participants, such as stockbrokers (e.g., Angel Broking, ShareKhan, etc.).

ASBA Account

• ASBA stands for ‘Application Supported by Blocked Account.’
• It is an application containing an authorization to block the application money in the bank account for subscribing to an issue.

Mutual Fund

• A mutual fund is a corporate body registered with SEBI that pools money from individuals/corporate investors and invests it in various financial instruments or securities.
• Mutual funds act as financial intermediaries in the investment business, collecting funds from the public and investing on their behalf.

Equity Shares

• Equity shares are ordinary shares that represent fractional ownership in a business venture.
• They can be classified into rights issue/rights shares, bonus shares, preference shares, cumulative preference shares, and cumulative non-convertible preference shares.

Bonds

• A bond is a normally unsecured negotiable certificate evidencing indebtedness.
• Bonds are generally issued by a company, municipality, or government agency.