Capital Market

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Financial Markets and Services

Capital Market:
A capital market is a market for medium and long-term
funds. It includes all the organizations, institutions, and instruments
that provide long-term and medium-term funds.
It does not include the instruments or institutions which
provide finance for a short period (up to one year). The common
instruments used in the capital market are shares, debentures,
mutual funds, etc.

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Financial Markets and Services

Features of Capital Market:
 The link between Savers and Investment Opportunities:
The capital market is a crucial link between the saving and
investment process. The capital market transfers money from
savers to borrowers.
 Deals in Long-Term Investment:
The capital market provides funds for the long and medium
term. It does not deal with channelizing saving for less than one
year.

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 Utilises Intermediaries:
The capital market uses different intermediaries such as
brokers, underwriters, depositories, etc. These intermediaries act as
working organs of the capital market and are very important
elements.
 Rules and Regulations:
The capital markets operate under the regulation and rules of
the Government, thus making them a safe place to trade.

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 Helps in Capital formation:
The capital market offers opportunities for those investors
who have a surplus amount of money and want to park their money
in some investment and benefit from the power of compounding.

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Functions of Capital Market:
 Economic Growth:
Capital Markets help to accelerate the process of economic
growth. It reflects the general condition of the economy. The capital
Market helps in the proper allocation of resources from the people
who have surplus capital to the people who are in need of capital.
So, it helps expand the industry and trade of both public and private
sectors leading to balanced economic growth in the country.

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 Promotes Saving Habits:
After the development of Capital Markets, the taxation
system and the banking institutions provided facilities and
provisions to the investors to save more, without Capital Markets,
they might have invested in unproductive assets like land or gold
or indulged in unnecessary spending.

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 Stable and Systematic Security prices:
Apart from the mobilization of funds, Capital Markets help
to stabilize the prices of stocks. Reduction in speculative activities
and helps in the stabilization of the security prices.

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 Availability of Funds:
Investments are made in Capital Markets continuously. Both
the buyers and sellers interact and trade their capital and assets
through an online platform. Stock Exchanges like NSE and BSE
provide the platform for this, and thus the transactions in the capital
market become easy.

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Types of Capital Market:
 Primary Market:
The primary market mainly deals with new securities issued
in the stock market for the first time. Thus it is also known as the
new issue market. The main function of the primary market is to
facilitate the transfer of newly issued shares from the companies to
the public. The main investors in this type of market are financial
institutions, banks, HNIs, etc.

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 Secondary Market:
It is the market where the trading of securities takes place.
Thus, it is also referred to as the stock market. Here the buying and
selling of securities take place, The existing investors sell the
securities, and new investors buy the securities.

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Difference between Capital Market and Money Market:
Basis Money Market Capital Market
Meaning A segment of the financial A section of financial market
market where lending and where long term securities are
borrowing of short term issued and traded.
securities are done.
Nature of Informal Formal
Market
Financial Treasury Bills, Commercial Shares, Debentures, Bonds,
instruments Papers, Certificate of Retained Earnings, Asset
Deposit, Trade Credit etc. Securitization, Euro Issues
etc.

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Basis Money Market Capital Market
Risk Factor Low Comparatively High

Liquidity High Low

Purpose To fulfill short term credit To fulfill long term credit

needs of the business. needs of the business.

Time Horizon Within a year More than a year

Return on Less Comparatively High

Investment

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Role of Stock Exchanges in India
Raising Capital for Business:
The Stock Exchange allows companies to raise capital for
expansion by selling shares to the investing public.

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Mobilizing Savings for Investment:
When people draw their savings and invest in shares, it can
be mobilized and redirected to promote business activity with
benefits for several economic sectors such as agriculture,
commerce, and industry, resulting in stronger economic growth
and higher productivity levels.

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Facilitate Company Growth:
Companies view acquisitions as an opportunity to expand
product lines, increase distribution channels, hedge against
volatility, increase market share, or acquire other necessary
business assets. A takeover bid or a merger agreement through the
stock market is one of the simplest and most common ways for a
company to grow by acquiring fusion.

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Redistribution of Wealth:
By giving a wide spectrum of people a chance to buy shares
and become part owners (shareholders) of profitable enterprises,
the stock market helps reduce large income inequalities. Through
stock price rise and dividends, casual and professional stock
investors get a chance to share in the profits of the promising
business that other people set up.

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Corporate Governance:
By having a wide and varied scope of owners, companies
generally tend to improve on their management standards and
efficiency to satisfy the demands of these shareholders and the
more stringent rules for public corporations by public stock
exchanges and the government. Consequently, it is alleged that
public companies tend to have better management records than
privately held companies.

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Creates Investment Opportunities for Small Investors:
As opposed to other businesses that require huge capital
outlay, investing in shares is open to both large and small stock
investors because a person buys the number of shares they can
afford. Therefore the Stock Exchange provides an extra source of
income to small savers.

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Government Raises Capital for Development Projects:
Governments at various levels may decide to borrow money
to finance infrastructure projects such as sewage and water
treatment works or housing estates by selling another category of
securities known as bonds. These bonds can be raised through the
Stock Exchange, whereby public members buy them, thus loaning
money to the government.

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Barometer of the Economy:
Share prices rise and fall at the stock exchange, depending
largely on market forces. Share prices tend to rise or remain stable
when companies and the economy generally show signs of stability
and growth. An economic recession, depression, or financial crisis
could eventually lead to a stock market crash. Therefore, the
movement of share prices and, in general, of the stock indexes can
be an indicator of the general trend in the economy.

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Relevance of capital market to corporate finance:
Capital markets play a crucial role in corporate finance as
they provide a source of long-term financing for corporations.
Capital markets include stock markets (such as the BSE &
NSE ), bond markets, and other financial markets where
corporations can raise capital by issuing securities, such as stocks
and bonds.
This allows corporations to fund new projects, expand their
operations, and pay off existing debt.

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Capital markets also provide a way for investors to buy and
sell securities, providing a source of liquidity for corporations and
helping them manage their financial risks.
The overall result is a more efficient allocation of capital
that helps support economic growth and development.

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SEBI and investor protection:
SEBI (Securities and Exchange Board of India) is the
regulator of the securities market in India, and one of its main
functions is to protect the interests of investors in the securities
market. Some of the ways SEBI protects investors include:
 Disclosing Information:
SEBI requires companies to disclose information about their
financial performance and other relevant details to potential
investors.

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 Insider Trading Regulations:
SEBI has regulations to prevent insider trading and ensure
fair and transparent transactions in the securities market.
 Investor Education:
SEBI conducts investor education programs and provides
resources to help investors make informed investment decisions.
 Monitoring Market Activities:
SEBI monitors the securities market and takes action against
any fraudulent or manipulative practices that may harm investors.

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 Redressal of Investor Grievances:
SEBI has established mechanisms to address investor
complaints and resolve disputes between investors and companies.
Overall, SEBI promotes a fair and transparent securities
market and protects investors’ interests.

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