What Are Capital Markets?

It is the best medium of funds for institutions and offers various modes of investment avenues to all the investors who encourage capital building. let’s understand Capital markets and their functions briefly along with their tradable instruments.

What Are Capital Markets?  

The Capital market is a cog in the wheel of the modern economy since capital markets move money from the entities that have money to the entities that require money for productive use. The Capital market is a place where savings and investments are channeled between suppliers and receivers of funds. Suppliers may be an institution or a person with capital to invest or lend which generally includes banks or investors. Those who need capital in this sphere are typically businesses, governments, or individuals. The Capital market is a huge arena that is composed of primary markets, secondary markets, stock markets, and bond markets. They seek to improve transactional efficiencies by bringing on the same platform the suppliers with those seeking capital and providing a place where they can exchange securities. A few examples of capital markets may include New York Stock Exchange (NYSE), American Stock Exchange(ASE), London Stock Exchange(LSE), and NASDAQ. Such securities can also be traded “over the counter,” rather than on an organized exchange.

What are the Functions of the Capital Market?  

The main functions of the capital market are:

• The capital market acts as the key for investors and savers.

• It helps in the movement of funds to more productive requirements to boost the national income.

• It helps in the productive utilization of savings to finance any long-term investment.

• It facilitates securities trading.

• It lowers transaction costs and information costs.

• It helps in faster valuations of financial related instruments.

• With help of derivative trading, it hedges against market risks.

• It helps to facilitate transaction settlement.

• It improves the effectiveness of capital allocation.

• It provides continuous availability of funds to corporations and governments.

Read: Global Fintech Interview with Mark Fidelman, Chief Executive Officer at SmartBlocks

Capital market – Advantages  

• Money moves among people who need capital and who have the capital.

• There is more productivity in the transactions.

• Securities in the form of shares help to earn dividend income.

• The growth in the value of investments is high with time.

• The interest rates given by Bonds are higher than interest rates given by banks.

• Tax benefits can be taken by investing in stock markets.

• Securities of capital markets can be used as collateral to obtain loans.

Types Of Capital Markets  

Primary Market  

At the point when an organization publicly sells new stocks or securities interestingly, like in the first sale of stock (Initial public offering), it does as such in the primary capital market. This market is at times called the new issues market. When one purchases securities in the primary market, the institution that offers the securities hires an underwriting firm to review it and create a prospectus and other details of the securities to be issued. Small investors are frequently unfit to purchase securities on the primary market because the organization and its investment bankers need to sell every one of the accessible protections in a brief timeframe to meet the expected volume, and they should zero in on showcasing the deal to enormous financial investors who can purchase more securities at once.

Secondary Market  

The secondary market incorporates venues directed by an administrative body like the SEC where these recently given protections are exchanged between financial investors. Giving organizations don’t have a part in the secondary market. The New York Stock Exchange and Nasdaq are instances of secondary markets. The secondary market has two unique classifications: the auction and the dealer markets. The auction market is like an open outcry framework where purchasers and dealers assemble in one area and report the costs at which they will trade their securities. The NYSE is one such example. In dealer markets, however, individuals exchange through electronic networks. Most small investors trade through dealer markets.

What are the instruments traded in the Capital Market?  

1. Equities:  

Equity is the portion of a company’s ownership that is held by its stakeholders. To put it plainly, it pertains to a purchase of business equity stock in exchange for joining the company as a shareholder. Once more, we can divide it into Equity shares and Preference shares.

2. Debt Securities:  

Debt Securities can be categorized into bonds and debentures.   Bonds are fixed-income instruments that are issued by the government, municipalities, and even companies for financing infrastructural development or other types of projects. Bonds generally have a lock-in period. Debentures are unsecured investment options, unlike bonds without any collateral. The lending is based on mutual trust and, herein, investors act as potential creditors of an issuing institution.

3. Derivatives:  

These are the financial products, such as money, bonds, stocks, and stock indexes, whose values are generated from the underlying assets. Forwards, futures, options, and interest rate swaps are the four different categories of derivative securities.

4. Exchange-Traded Funds:  

Exchange-traded funds are a collection of assets owned by a large number of investors who purchase a variety of capital instruments, such as shares, debt securities, bonds, or derivatives. For financial investors with minimal expertise and knowledge of the capital stock market, the fact that the majority of ETFs are registered with the Securities and Exchange Board of India (SEBI) makes them an astounding option.

5. Foreign Exchange Instruments:  

These are financial instruments that are offered on international markets. It comprises of derivatives and currency agreements. They can be further divided into spot, outright forwards, and currency swaps based on currency agreements.

  The Bottom Line  

Capital markets are a crucial part of the financial industry. They bring together suppliers and receivers of capital under one roof. This includes governments that want to fund infrastructure projects, corporates that need expansion, and even people who want to buy a home. The key benefit to these markets is that they allow money to move from those who have it to those who need it for their purposes.

Read: Global Fintech Interview with Jitin Bhasin, Founder & CEO at SaveIN