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An in-depth guide to capital markets covering their definition, types, instruments, structure, and economic role.
Capital markets are financial markets dedicated to the buying and selling of long-term securities such as stocks and bonds. They enable organisations to raise capital by issuing equity or debt securities, while offering investors opportunities to invest for returns over extended periods.
A capital market’s core function is to channel funds from investors to entities requiring capital for productive use, fostering economic development.
Capital markets are platforms where savings and investments are channeled between suppliers of capital—like individual and institutional investors—and those who seek capital, such as businesses and governments.
Capital markets can be broadly categorised based on the stage of securities issuance and the nature of instruments traded. Here is how they are categorised:
The primary market is where new securities are issued and sold for the first time. Companies raise fresh capital by issuing shares or bonds to investors. The Initial Public Offering (IPO) is a key feature, allowing private companies to go public and access public capital.
In this market, intermediaries such as merchant bankers, underwriters, and registrars play essential roles in facilitating issuance and compliance.
Once securities are issued in the primary market, they are traded among investors in the secondary market. This market provides liquidity, enabling investors to buy or sell securities at market prices without affecting the company’s capital directly.
National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) serve as major platforms for secondary market trading.
The debt market, also called the bond market, deals with fixed-income securities. Governments and corporates issue bonds and debentures to borrow funds. Investors receive periodic interest payments and principal repayment at maturity.
The debt market provides an important avenue for relatively lower-risk, income-generating investments.
The equity market involves trading of shares that represent ownership in companies. Equity investors may earn dividends and benefit from capital appreciation. Shares can be common (ordinary) or preference shares with different rights.
Capital markets include a variety of platforms and instruments where long-term funds are raised and traded. Common examples include:
Stock Markets – Where shares of publicly listed companies are bought and sold (e.g., BSE, NSE).
Bond Markets – Where corporate or government bonds are issued and traded.
Derivatives Markets – Where financial contracts like futures and options are traded to hedge risks.
Primary Markets – Where new securities are issued directly by companies (e.g., through IPOs).
Secondary Markets – Where existing securities are traded among investors.
Capital markets feature a variety of financial instruments suited to different investment goals and risk profiles, such as:
Equity Shares: Represent ownership; holders have voting rights and dividend claims.
Preference Shares: Typically provide fixed dividends and have priority over common shares in asset claims.
Bonds and Debentures: Debt instruments with fixed or floating interest rates; can be secured or unsecured.
Mutual Funds: Pooled investment vehicles investing in equity and/or debt instruments.
Derivatives: Contracts based on the value of underlying securities, including futures and options (overview only).
Capital markets comprise several interconnected participants and infrastructure components:
Stock Exchanges: Platforms like NSE and BSE where securities are bought and sold.
Regulatory Authorities: The Securities and Exchange Board of India (SEBI) oversees market integrity, investor protection, and regulation enforcement.
Market Intermediaries: Brokers, merchant bankers, depositories (NSDL, CDSL), and registrars assist in trading, issuance, and settlement.
Investors: Retail investors, institutional investors (mutual funds, insurance companies), and foreign portfolio investors (FPIs) participate in markets.
Capital markets perform critical roles in the economy by:
Mobilising Savings: Converting household and corporate savings into investable funds.
Price Discovery: Reflecting the true value of securities through market mechanisms.
Providing Liquidity: Allowing investors to buy and sell securities readily.
Risk Sharing: Distributing investment risk among multiple investors.
Enhancing Corporate Governance: Through transparency and regulatory disclosures.
Facilitating Economic Growth: By providing capital to productive sectors.
Capital markets contribute to economic development by:
Enabling long-term funding for businesses and infrastructure.
Promoting transparency and efficiency in capital allocation.
Offering accessibility and diversification opportunities for investors.
Being supported by regulatory oversight to maintain fairness and reduce fraud.
Adapting to technological advances for faster and wider access.
Capital markets are fundamental to the functioning of modern economies by efficiently connecting investors and borrowers through long-term financial instruments. Understanding their types, instruments, structure, and functions enables investors to appreciate their role in wealth creation and economic development. Regulatory frameworks ensure transparency and fairness, fostering trust and participation in these markets.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Securities and Exchange Board of India (SEBI) – https://www.sebi.gov.in/
National Stock Exchange (NSE) – https://www.nseindia.com/
Bombay Stock Exchange (BSE) – https://www.bseindia.com/
Ministry of Finance, Government of India – https://www.finmin.nic.in/
Reserve Bank of India (RBI) – https://www.rbi.org.in/
Investopedia – https://www.investopedia.com/terms/c/capitalmarket.asp
Corporate Finance Institute – https://corporatefinanceinstitute.com/resources/knowledge/economics/capital-markets/
The capital market is a financial market where long-term securities such as stocks and bonds are issued and traded.
The primary market (new issues) and secondary market (trading existing securities), further divided into equity and debt markets.
Common instruments include equity shares, preference shares, bonds, debentures, mutual funds, and derivatives.
It mobilises savings, facilitates investment, provides liquidity, and supports economic growth through capital formation.
The money market deals with short-term funding instruments, while the capital market focuses on long-term securities.
