The term capital market refers to facilities and institutional arrangements through which long-term funds; both debt and equity are raised and invested. It consists of a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general. An ideal capital market is one where finance is available at reasonable cost. The process of economic development is facilitated by the existence of a well-functioning capital market. In fact, development of the financial system is seen as a necessary condition for economic growth. It is essential that financial institutions are sufficiently developed and that market operations are free, fair, competitive and transparent. The capital market should also be efficient in respect of the information that it delivers, minimize transaction costs and allocate capital most productively.

Definition:  Capital market can be defined as ” an organised mechanism for transfer of money capital and financial resources from investing parties to entrepreneurs engaged in industry and commerce.”

Capital Market can be divided into two parts :

1) Primary Market/New issue Market :  New issue market deals with the new securities which are offered for the first time in the market i.e. new block of shares, debentures etc. this involves

a) Issue of new securities in the primary market i.e. directing cash flows from the surplus sector to the deficit sector such as government and corporate sector. ( here securities are issued directly to the public by corporates and government)

b) Issue of secondary securities in the primary market, i.e. directing cash flows from the surplus sectors to the financial intermediaries such as banking and non-banking financial institutions.(here securities are not directly issued to the public, i.e. securities are first issued to financial intermediaries and then these financial intermediaries issue those securities to the public)

2) Secondary Market: The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market. It also provides liquidity and marketability to existing securities. It also contributes to economic growth by channelizing funds towards the most productive investments through the process of disinvestment and reinvestment. Securities are traded, cleared and settled within the regulatory framework prescribed by SEBI.


Functions of Capital Market :

  1. Mobilizing long term savings to finance long-term investments.
  2. providing risk capital in the form of equity and quasi-equity to entrepreneurs.
  3. provide liquidity with a mechanism enabling the investors to sell financial assets.
  4. lower the cost of transaction and information.
  5. improve the efficiency of capital allocation through the competitive price mechanism.
  6. enable quick valuation of financial instruments – both equity and debt.
  7. provide insurance against market risk or price risk through derivative trading and default risk through investor protection fund.
  8. enable wider participation by enhancing the width of the market by encouraging both individual and institutional investors within and outside the country.
  9. provide operational efficiency through – a) simplified transaction procedure. b) lowering settlement timings and c) lowering transaction cost.
  10. develop integration among – a) Real and financial sectors.  b)equity and debt instruments.  c)long term and short term funds.  d)private and government sectors and domestic and foreign funds.