Capital Market
The capital market constitutes a division within the financial market where various long-term
securities, including stocks, bonds, and other financial instruments, are traded. This platform serves
as a means for businesses and governments to acquire capital while enabling investors to engage in
trading these securities for potential returns. An essential function of the capital market is to
facilitate the flow of funds from individuals who save to entities in need of financing, consequently
supporting enduring investments in the economy.
Capital Market
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Types of Capital Market
Here are various types of Capital Markets and their corresponding examples presented in the table
given below:
Capital Market
Description Examples
Type
Commodities Market for buying and selling Multi Commodity Exchange (MCX), National
Market commodities Commodity and Derivatives Exchange (NCDEX)
Market for buying and selling debt Government Bonds, Corporate Bonds,
Debt Market
instruments Debentures
Derivatives Market for trading derivative
Futures, Options, Swaps
Market contracts
Market for buying and selling National Stock Exchange (NSE), Bombay Stock
Equity Market
shares of ownership in companies Exchange (BSE)
Foreign Exchange Market for buying and selling Interbank Foreign Exchange Market, Forex
Market currencies Exchange Market
Money Market Market for short-term borrowing Treasury Bills, Commercial Paper, Certificates
Capital Market
Description Examples
Type
and lending of Deposit
Market for buying and selling Secondary Mortgage Market, Mortgage-
Mortgage Market
mortgage-backed securities Backed Securities (MBS)
Market for issuing and buying Initial Public Offerings (IPOs), Rights Issues,
Primary Market
newly issued securities Private Placements
Market for buying and selling Stock Exchanges, Over-the-Counter (OTC)
Secondary Market
existing securities Markets
These distinct categories of these markets offer opportunities for investors to engage in diverse
financial instruments, trade securities, and access various sectors of the economy.
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Capital Market Overview in India
The capital market in India pertains to the sector of the financial market dealing with long-term
securities like stocks and bonds. Below are insights into the structure and historical progression of
the Indian capital market:
Structure of the Indian Capital Market
Primary Market: In India, the primary market entails the initial issuance of new securities to the
public. This encompasses Initial Public Offerings (IPOs), rights issues, and private placements.
Oversight of the primary market is carried out by the Securities and Exchange Board of India (SEBI).
Secondary Market: The secondary market is where already issued securities are traded among
investors. It incorporates stock exchanges, notably the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE), facilitating the trading of equity shares, bonds, and other securities.
SEBI also oversees the operations of the secondary market.
Stock Exchanges: India’s major stock exchanges are the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE). These exchanges offer electronic trading platforms for securities
transactions, contributing to price determination, liquidity enhancement, and equitable and
transparent trading practices.
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Securities Depositories: The National Securities Depository Limited (NSDL) and the Central
Depository Services Limited (CDSL) function as central securities depositories in India. They
streamline the electronic holding and settlement of securities, obviating the need for physical
certificates.
Regulatory Authorities: SEBI is the regulatory authority governing India’s market. It oversees the
functioning of stock exchanges, brokers, investment banks, and intermediaries. SEBI formulates
regulations, monitors market activities, and safeguards the interests of investors while ensuring
market integrity.
Instruments in Capital Market
Here are various instruments of the capital market in India, presented in a table below:
Instrument Description
Fixed-income securities issued by governments and corporations, paying
Bonds
periodic interest and returning the principal.
Short-term unsecured promissory notes issued by corporations to meet
Commercial Paper
short-term funding needs.
Long-term debt instruments issued by companies, providing fixed interest
Debentures
payments and repayment of principal.
Financial contracts with values derived from underlying assets, used for
Derivatives
hedging, speculation, and risk management.
Represent ownership in a company; investors receive dividends and have
Equity Shares
voting rights.
Exchange-Traded Funds Invest in a basket of securities and trade on stock exchanges like
(ETFs) individual stocks.
Infrastructure Investment Allow investment in infrastructure projects, providing regular income
Trusts (InvITs) through distributions from project cash flows.
Pool funds from multiple investors to invest in a diversified portfolio of
Mutual Funds
securities, managed by professional fund managers.
Carry preferential rights over equity shares, such as fixed dividend
Preference Shares
payouts and priority in case of liquidation.
Real Estate Investment Enable investment in income-generating real estate assets, offering
Trusts (REITs) regular income and potential capital appreciation.
Short-term government securities issued to raise funds and manage the
Treasury Bills
short-term liquidity needs of the government.
These instruments offer a range of opportunities for individuals and institutions to invest, raise
capital, manage risks, and engage in the Indian capital market.
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Historical Evolution of the Indian Capital Market
The Indian capital market has undergone substantial evolution, with pivotal milestones including:
Establishment of the Bombay Stock Exchange (BSE) in 1875 as India’s inaugural stock
exchange. What began as a consortium of stockbrokers grew to become a prominent Asian
stock exchange. Founding of the Securities and Exchange Board of India (SEBI) in 1988,
authorized to regulate the securities market.
It was empowered in 1992 with statutory authority to develop and oversee the capital
market. Inception of the National Stock Exchange (NSE) in 1992, a technology-driven
exchange introducing transparent and efficient trading through electronic systems and
innovative products. Implementation of the Depository Act in 1996 leading to the
establishment of NSDL and CDSL.
This facilitated the dematerialization and electronic settlement of securities, enhancing
efficiency and security.
Enactment of reforms and liberalization measures, including online trading initiation,
demutualization of stock exchanges, and gradual opening of the capital market to foreign
investors.
These advancements have fostered the growth and maturation of India’s market, rendering it
a crucial platform for capital mobilization and investment facilitation within the nation.
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Functions of Capital Markets
The functions performed by capital markets are diverse and contribute significantly to the effective
allocation of capital and the advancement of economic growth. Here are the primary roles that
capital markets fulfill:
Capital Mobilization: Capital markets serve as a platform where entities such as businesses,
governments, and others can secure long-term capital by issuing securities like stocks and bonds.
This avenue enables them to finance ventures, expand their endeavors, support projects, and foster
economic progress.
Investment Opportunities: Within capital markets, a broad array of investment prospects is available
to both individuals and institutions. Investors can partake in the capital market by acquiring
securities and earning returns in the form of dividends, interest payments, and capital appreciation.
Liquidity Provision: Facilitating liquidity is another key role of capital markets, allowing investors to
smoothly trade securities. The secondary market facilitates the transfer of securities, granting
investors the ability to convert investments into cash when required.
Price Determination: The process of price discovery is facilitated by capital markets, where buyers
and sellers interact to establish fair security prices. The equilibrium between supply and demand
dictates these prices, reflecting perceived value and market sentiment.
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Risk Management: Capital markets offer instruments like derivatives that enable investors to
mitigate risks associated with market uncertainties, interest rate shifts, and price fluctuations. These
risk management tools help in hedging and transferring risk exposure.
Efficient Capital Allocation: Efficient capital allocation is a pivotal function of capital markets.
Investors direct funds toward enterprises and projects displaying strong growth potential, which
enhances resource allocation and economic efficiency.
Wealth Generation and Distribution: Participation in wealth generation is made possible by capital
markets for both individuals and institutions. Through investments in securities, the opportunity to
accumulate wealth and earn returns is extended, thus contributing to wealth distribution and
economic inclusivity.
Corporate Governance and Transparency: Listed companies in capital markets are mandated to
adhere to transparency and accountability standards, which promotes good corporate governance.
This requirement fosters transparency, accountability, and investor trust in the financial system.
In summary, the roles carried out by these markets, including mobilizing savings, supporting
investment, managing risks, efficiently allocating capital, and promoting economic growth, are of
utmost importance