Sunday, April 26, 2015

Capital Market - Meaning, Importance and Difference

Meaning of Capital Market
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,

Ø  Primary market or new issue market, and
Ø  Secondary market or stock exchange.
As a rule, only when a country’s primary market is alone, it is possible to ensure a good degree of activity in the secondary market because it is the primary market which ensures a continuous flow of securities to the secondary market.

On the contrary, if secondary marker is only active but not transparent and disciplined, it becomes difficult to develop and sustain the flow of equity and related investment in the primary market. This is because the liquidity which the secondary market imparts to such investments in the hands of the investors is adversely affected.

Importance of Capital Market
Capital markets are markets where productive capital is raised and made available for industrial purposes. Importance of Capital Market are mentioned below:

a)      It provides an avenue for investors and household sector to invest in financial assets which are more productive than physical assets. A developed capital market can solve the problem of paucity of funds.

b)      It facilitates increase in production and productivity in the economy and hence enhances the economic welfare of the society. Indian capital market acts as an intermediary to mobilize savings and to channelize the same for productive use consistent with national priorities.

c)       The industrial securities issued through the primary market are traded in the secondary market which provides liquidity and short-term as well as long-term yields.

d)      An efficient primary market prepares base for effective and cost efficient mobilization of resources by bringing together the users and investors of funds.
Thus, both the primary and secondary markets helps each other and make the capital market efficient, healthy, and strong

Distinction Between Capital Market and Money Market
The capital market should be distinguished from money market. The capital market is the market for long-term funds. On the other hand money market is primarily the market for shortterm funds. However, the two markets are closely related as the same institution many a times deals in both types of funds, i.e. short-term as well as long-term. The main points of distinction between the two markets are as under :
Capital Market
Money Market
1. It provides finance/money capital for long-term investment.
1. It provides finance/money for short-term investment.

2. The finance provided by the capital market may be used both for fixed and working capital.
2. The finance provided by money market is utilized, usually for working capital.
3. Mobilisation of resources and effective utilization of resources through lending are its main functions.
3. Lending and borrowing are its principal functions to facilitate adjustment of liquidity position.
4. It’s one of the constituents, Stock Exchange acts as an investment market for buyers and sellers of securities.
4. It does not provide such facilities. The main components include call loan market, collateral loan market, bill market and acceptance houses.
5. It acts as a middleman between the investor and the entrepreneur.
5. It acts as a link between the depositor and the borrower.
6. Underwriting is one of its primary activities.
6. Underwriting is a secondary function.

7. Its investment institutions raise capital from public and invest in selected securities so as to give the highest possible return with the lowest risk.
7. It provides outlets to commercial banks, business corporations, non-bank financial concerns and other for their short-term surplus funds.
8. It provides long-term funds to Central and State Governments, public and local bodies for development purposes.
8. It provides short-term funds to Government by purchasing treasury bills and to others by discounting bills of exchange etc.