Question

Briefly discuss capital market.

Hint:

Capital Market = Long-term funds (> 1 year)
Instruments: Shares, Debentures, Bonds
Regulator: SEBI 
Parts: Primary Market (new issues) + Secondary Market (trading)

Answer 1

Definition: The capital market is a component of the financial market where medium-term and long-term funds (more than one year) are raised and traded. It deals in securities such as shares, debentures, bonds, and other long-term investments. Key Features of Capital Market:

• Long-term: Maturity period more than one year
• Less Liquidity: Compared to money market, but still tradable
• Higher Risk: Instruments carry market risk, credit risk
• Physical and Electronic Exchanges: Has organized stock exchanges
• Participants: Individual investors, institutional investors, corporations, government, foreign investors

Capital Market Instruments:

Instrument	Description
Equity Shares	Ownership capital with voting rights
Preference Shares	Fixed dividend, priority over equity
Debentures/Bonds	Long-term debt instruments with fixed interest
Government Securities	Long-term borrowing by government (G-Secs)
Mutual Funds	Pooled investment in diversified portfolio
Derivatives	Futures, options, swaps for hedging and speculation

Structure of Capital Market:

• Primary Market (New Issues Market):
  • Where new securities are issued for the first time
  • Methods: IPO, FPO, Rights Issue, Private Placement
• Secondary Market (Stock Market):
  • Where existing securities are traded among investors
  • Provides liquidity to investors
  • Examples: BSE, NSE

Functions of Capital Market:

• Mobilizes long-term savings for investment
• Facilitates capital formation and economic growth
• Provides liquidity to investors through trading
• Helps in price discovery of securities
• Encourages foreign investment

Regulator: In India, the capital market is regulated by the Securities and Exchange Board of India (SEBI).