The capital market is a market in which the securities with maturities of more than one year are bought and sold. The capital market refers to the market for long term securities, such as corporate stocks and bonds, for financing long term assets. The major players being Corporates, Banks, Financial Institutions, Mutual Funds etc. The capital market is further classified as follows:
a. Primary Capital Market
The ‘primary capital market’ is one in which new issues of common stock, bonds and preferred sotck are sold by companies. The proceeds raised in this market is the new capital funds.
b. Secondary Capital Market
The secondary capital markets are also called ‘stock markets: In the secondary markets, the outstanding issues are permitted to trade. In this market, a stock or bond issue which has already been sold to the public, and it is traded between current and potential owners. The proceeds from a sale in the secondary market do not go to the issuing organisation but to the current owner of the security. The stock markets are classified as follows:
i. Stock Exchanges
The Stock Exchanges will have a physical location where stocks buying and selling transactions take place in the stock exchange floor.
ii. Over the Counter Exchange
Where shares, bonds, and money market instruments are traded using a system of computer screens and telephones is called ‘Over the Counter Exchange
Capital market is the barometer of the economy and represents the macro economic affairs of the country. It is an index of economic and industrial development of the country. Capital market discounts the future and it is reflection of future of the economy. In the long run it is a true measure of the health of any economy.
In the capitalistic economy, the capital markets playa pivotal role by bring the common investor to invest in corporate securities. The global trend is that even socialist countries like China and Russia are moving towards capitalistic economy by inviting the private investments into the industry.
Financial disintermediation along with diversification of financial sector is one of the important develop-ments in the era of liberalisation world over. The term financial disintermediation’ refers to the transformation of a financial system from institution based to market based.
In an institution based financial system, the role of financial intermediaries like Bank is prominent in mobilisation and allocation of financial resources. In the current capital market system, the role of banks as intermediaries is diluted in the market based system where the investor and user of funds are expected to come into direct contact with the borrowers i.e. the corporates.
A tendency was developed among the corporate houses to access savings directly through public deposits, commercial paper, Equity and Debenture issues etc. This process of transformation has been further facilitated by the introduction of a set of new financial instruments with varied degrees of liquidity, risk and returns. Among the instruments, mutual funds, bonds and derivative instruments are more active which have grasped a substantial share in resource mobilisation giving a challenge to traditional monetary assets such as bank deposits. Similarly, instruments like deep discount bonds, zero coupon bonds and other bonds with very long maturity period compete with traditional term saving instruments. The nature, extent, and efficiency of disintermediation varies from country to country. The USA and UK have a market based system while economies like Germany and Japan are dominated by bank based financial system.
In the era of globalisation and liberalisation, the capital markets assume a greater importance. The smooth functioning of the capital market depends on the regulators, participants and investors. The past decade has been a golden age for securities market in India. It is now a far more important source of finance than traditional financial intermediaries for corporate sector. It is poised to dominate the future of corporate finance in India.
The process of reforms has led to a pace of growth of markets almost unparalleled in the history of any country. Securities market in India has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalisation, trading volumes and turnover on stock exchanges, and investor population.