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Capital Market and its Types

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  • September 14, 2021
Capital Market and its Types

A capital market is a platform for buyers and sellers of financial instruments. It provides a lucrative place for investments fitting each type of investor’s financial goals and portfolio. Businesses and governments utilise the capital market for creating cash inflows and resources to be used for revenue generation and expansion. Capital market instruments include equity shares, preference shares, bonds, debentures, derivatives and hybrid tools, among others. 

The equity market and debt market are both subcategories of the capital market, which together comprise the lending and borrowing of all capital investments. 

How does a capital market work?

A capital market provides companies with an avenue to raise funds for their business operations. It is a three-fold process. It begins with the companies offering stakes or bonds in return for the investors’ money. The interested parties invest in those financial instruments with aspirations to grow their wealth over time. Upon receiving the money, the investor is granted a share or a bond, and the company gets the money they need.

However, what happens when an investor wants to liquidate their assets? Remember, the capital market is a network of buyers and sellers. The buyers only have to find a seller to acquire their stake. This helps the previous investor liquidate his investment while making a profit.

Of course, as money is involved, we need regulatory bodies for the capital market at large. We have three in India:

  • The Ministry of Finance
  • The Securities and Exchange Board of India
  • The Reserve Bank of India

Now, each of these regulatory authorities have different roles to play and have separate well-charted jurisdiction areas.

Structure of capital market

Although the capital market can be largely divided into primary market and secondary market, we can also divide the capital market as per its various elements.

Suppliers:

These participants bring in the money and among them, individual investors, financial banks, retirement/mutual funds, and insurance houses are the key providers.

Takers:

These are participants that also fall under the category of investment. When you invest in a share or bond or fund scheme, you essentially invest in the company or the government bill that is guiding it.

Middlemen:

These are brokerage houses or AMCs that enable you to purchase and sell your investments in the marketplace. They can either provide direct access to the market or do it for you. In the case of brokerage apps, one can directly partake in the equity market. However, AMCs will invest in the stock exchange for the investor via mutual funds.

Regulators:

As discussed earlier, for the interest of the investors as well as the investment, apex bodies are needed to carry out unbiased monetary administration.

Next, let’s look at the types of capital markets in India. It can be divided into primary and secondary markets based on the mode and choice of investment assets.

Primary market

This market is for fresh securities that come out with public issues or as we know them, Initial Public Offerings (IPOs). An intermediary, like an investment bank, helps a company assess the right price for their launch. Upon receiving the approvals from SEBI, in the case of the equity market, the IPO is launched and the company gets its funds via the investors who have subscribed for the issue. The investors get shares based on the subscription volume and price, and once the listing is launched, the shares are bought and sold in the market.

Secondary market

After the issue, all securities are traded on the secondary market. In India, there are two stock exchanges: the National Security Exchange (NSE), and the Bombay Stock Exchange (BSE). The stock market isn’t the only secondary market; over-the-counter markets also comprise this group.

Functions of the capital market:

  • Ensures liquidity in the economy
  • Mobilises funds
  • Aids in a business growth
  • Helps in the national economic growth
  • Helps increase personal finances 
  • Provides instruments for all types of investors
  • Provides a common place for buyers and sellers

Drawbacks of the capital market

  • Volatility can lead to high risk and loss
  • Service charges and brokerage fees may eat into your profits

FAQs

1)    Is investing in the capital market a wise decision?

Based on whether you are an aggressive investor or conservative investor, you can find various options to choose from. You can pick equity, debt, or hybrid tools for your portfolio.

2)    What is the best app to invest in the market?

Ideally, you should choose an app that provides you with everything in one place and has low brokerage plans. TradeSmart is the right fit in both cases. You can click here to see some of our best features: Online Stock Trading at Lowest Brokerage in India | TradeSmart (tradesmartonline.in)

3)    Is the capital market safe?

Yes, it is a highly regulated space. However, investments are often prone to fluctuations. 

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