In this essay we will discuss about capital market:- 1. Meaning of Capital Market 2. Constituents of Capital Market.
Essay on the Meaning of Capital Market:
By the term Capital market we mean a market for long term funds, whereas the money market constitutes the market for short term funds. Capital market includes all existing facilities and institutional arrangements developed for borrowing and lending medium and long term funds available in the market.
This is not a market for capital goods, rather it is a market for raising and advancing money capital for investment purposes. According to V.A. Avadhani, “Capital market is a wide term used to comprise all operations in the New issues and stock market. New issues made by the companies constitute the primary market, while trading in the existing securities relates to the secondary market. While we can only buy in the primary market, we can buy and sell securities in the secondary market.”
In a capital market, the demand for long term funds mostly arises from private sector manufacturing industries, agricultural sector and also from the Government, which are again largely utilised for the economic development of the country. Even the consumer goods industries usually need a considerable support from the capital market.
Similarly, both the State and Central Governments which are engaged in developing infra- structural facilities viz., transport, power, irrigation, communications etc. along with the development of basic industries also need a considerable support from the capital market.
In a capital market, the supply of funds usually comes from individual savers, corporate savings various banks, insurance companies specialised financial agencies and also the Government.
Following are some of the institutions supplying funds to the Indian Capital market:
(i) Commercial banks in India, which are interested in government securities and on debentures of companies are considered as important investors;
(ii) Insurance companies like LIC and GIC have also attained growing importance in the Indian Capital market and are mostly investing in government securities;
(iii) Various special institutions viz., the IDBI, IFCI, ICICI, UTI etc. are giving long term capital to the private sector of the country; and
(iv) Provident funds of employees which constitute a major volume of savings but their investments are very much restricted in government securities.
Essay on Constituents of Capital Market:
After independence, the rapid growth and expansion of the corporate and public enterprises has necessitated the development of the capital market in India. The capital market is composed of the borrowers, who demand funds and the lenders, who supply funds in the market.
An ideal and sound capital market always tries to offer adequate quantity of capital to any industrial and business house at a reasonable rate which are expected to result high prospective yield to make the borrowing worthwhile.
In India, the capital market is broadly divided into two parts, i.e:
(a) The guilt edged market and
(b) The industrial securities market.
The guilt-edged market is backed by the Reserve Bank of India for marketing the government and semi- government securities. In this type of market, the value of securities remain stable and therefore, it is very much demanded by the banks and other financial institutions.
The industrial securities market is another segment of capital market which deals with shares and debentures of old and new companies. Such market is again divided into new issues market and the old capital market which is known as stock exchange.
The new issues market indicates the system of raising new capital by selling shares and debentures issued by companies. The old capital market refers to the marketing set up of securities already issued by various companies.
Although both the two types of markets are equally important but sometimes the new issues market are gaining its importance for the establishment of new industries so as to attain a higher rate of growth. But the functioning of new issue market will become successful only when the scope for transferring existing securities is abundant.
Moreover, the capital market is again divided into primary capital and secondary capital market. The primary capital market is a kind of new issue market related to the issue of shares, preference shares and debentures of various non-government public limited companies and also for raising fresh capital by the Government companies and also for issuing public sector bonds.
On the other hand, the secondary capital market is a market for old and issued securities. Thus the secondary capital market is comprised of industrial security market or the stock exchange, engaged in buying and selling of industrial securities, and the gilt- edged market, engaged in buying and selling of government and semi-government securities.
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