The capital market is a financial market where long-term securities such as stocks, bonds, and debentures are issued and traded. It enables organizations and governments to raise funds for developmental projects and expansion, while investors gain avenues for wealth creation.
Capital Market Ecosystem
Companies → Primary Market → Investors → Secondary Market
Key Features of the Capital Market
- Long-Term Focus: Facilitates investments with maturity periods longer than one year.
- Diverse Instruments: Includes equity (shares) and debt (bonds, debentures) instruments.
- Regulated Environment: Governed by regulatory bodies like SEBI (Securities and Exchange Board of India) to ensure transparency.
- Liquidity: Provides opportunities for buying and selling in secondary markets.
Structure of the Capital Market
| Segment | Purpose |
|---|---|
| Primary Market | Facilitates the issuance of new securities (e.g., IPOs). |
| Secondary Market | Enables trading of existing securities (e.g., stock exchanges). |
1. Primary Market
The primary market is where companies issue new securities to raise capital directly from investors. This process is also called the New Issue Market (NIM).
- Key Activities in the Primary Market:
- Initial Public Offerings (IPOs): First-time issuance of shares by companies.
- Follow-on Public Offerings (FPOs): Additional shares issued by companies already listed.
- Private Placements: Sale of securities to select institutional investors.
2. Secondary Market
The secondary market is where securities issued in the primary market are traded among investors. It provides liquidity and price discovery.
- Examples:
- Stock exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
Instruments in the Capital Market
| Instrument | Issuer | Purpose |
|---|---|---|
| Equity Shares | Corporates | Ownership funding for growth and expansion. |
| Preference Shares | Corporates | Fixed dividends with preferential treatment. |
| Debentures | Corporates | Long-term borrowing without collateral. |
| Bonds | Governments/Corporates | Debt financing with fixed interest rates. |
| Mutual Funds | Asset Management Companies | Pooling of funds for diversified investment. |
| Exchange-Traded Funds (ETFs) | Fund Houses | Passive investment in a market index. |
Key Participants in the Capital Market
| Participant | Role |
|---|---|
| Companies | Raise funds through equity and debt instruments. |
| Investors | Invest for long-term returns (e.g., retail, institutional). |
| Intermediaries | Brokers, underwriters, and depositories facilitate transactions. |
| Regulators | Ensure market transparency and investor protection (e.g., SEBI). |
Functions of the Capital Market
- Mobilization of Savings: Encourages individuals and institutions to invest savings in productive assets.
- Capital Formation: Provides long-term funds for business expansion and infrastructure development.
- Liquidity: Offers avenues for trading securities, ensuring ease of entry and exit for investors.
- Economic Growth: Fuels industries, infrastructure, and technological advancements.
- Price Discovery: Helps determine the fair value of securities based on market demand and supply.
Role of SEBI in the Capital Market
The Securities and Exchange Board of India (SEBI) ensures the smooth functioning of the capital market by:
- Regulating IPO Processes: Ensuring transparency and fairness in primary markets.
- Investor Protection: Penalizing fraudulent practices and misleading advertisements.
- Market Surveillance: Monitoring activities to prevent insider trading and manipulation.
Benefits of the Capital Market
- Wealth Creation for Investors: Long-term investments in equity can yield high returns.
- Economic Stability: Encourages balanced growth through industrial and infrastructural development.
- Risk Diversification: Wide range of instruments allows investors to diversify.
- Global Integration: Encourages foreign investments through mechanisms like ADRs/GDRs (American/Global Depository Receipts).
Challenges of the Capital Market
| Challenge | Impact |
|---|---|
| Volatility | Affects investor confidence. |
| Limited Retail Participation | Retail investors are hesitant to invest. |
| Regulatory Hurdles | Compliance can be complex for issuers. |
| Global Economic Influences | Events like recessions can disrupt markets. |
Comparison of Capital Market and Money Market
| Aspect | Capital Market | Money Market |
|---|---|---|
| Time Horizon | Long-term (>1 year) | Short-term (<1 year) |
| Instruments | Shares, Bonds, Debentures | T-Bills, CPs, CDs |
| Risk | Moderate to high | Low |
| Regulator | SEBI | RBI |
Capital Market Growth in India
India’s capital market has seen exponential growth in recent years, driven by technological advancements, increasing investor awareness, and supportive regulatory frameworks.
Data Snapshot: Stock Market Performance
| Year | Market Capitalization (₹ Trillion) | Number of Listed Companies |
|---|---|---|
| 2010 | 68 | 5,100 |
| 2023 | 282 | 7,000 |