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October 13, 2013

Introduction to Capital Market - Functions / Importance / Roles

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Unlike Money Market, which deals in the very short term loans, the capital market deals in medium and long term loans, the capital market deals in medium and long term loans. Business requires both types of loans short term and long term. The money market supplies short term finance where as capital market supplies medium and long term finance. Capital market contains financial instruments of maturity period exceeding one year. It involves long term financial transactions. Capital market in a broad sense encompasses all kinds of arrangements and financial institutions involved in long term financing. it is a market in which long-period securities having maturity financing. it is a market in which  long-period securities having maturity of more than a year are e3xchanged. It is divided into two parts,

  1. The new securities market which deals with the sale of new securities and shares
  2. The secondary market or stock exchange which deals in buying and selling of old securities, shares, stock, bonds debentures etc.
The Capital market consists of borrowers and suppliers of long term capital funds. The borrowers include mainly corporations for business purpose, the central and state government and local bodies, unincorporated businessmen, farmers, individuals etc. On the other hand suppliers include individuals financial institutions including commercial banks.

Thus, like all other markets, the capital market is also composed of those who demand long-term funds (borrowers) and those who supply long-terms funds (lenders). An ideal capital market attempts to provide adequate funds at reasonable cost to the borrowers and ensure fair return to the lenders.

Functions / Importance / Role of Capital Market 

Capital Market plays an important role in economic development of the country by providing term needs of industrialist and businessmen.
Following are the various functions and significance of capital market.
  1. Provides Link Between Savers and Investors : The capital market acts as a connecting link between those who wants to save and those who wants to invest in business and industrial sector. Thus capital market plays a very important role in diverting the financial resources form surplus and wasteful areas to deficient and productive areas which increases the welfare and productivity of the economy.
  2. Capital Formation : Capital Market helps in formulation of capital by encouraging saving habit among the public specially in underdeveloped countries. Capital market plays an important role by transferring the investment from unproductive and wasteful directions to productive lines.
  3. Macroeconomic Financial Balancing : Macroeconomics financial balancing capital market mobilizes funds form surplus units to deficit units through appropriate financial inter-mediation.
  4. Growth of Corporate Sector : Capital market facilitates the project financing and growth of corporate sector. 
  5. Optimum Utilization of Resources : It channelizes the allocation of the funds from less profitable to more profitable channels. It thus helps in optimum utilization of resources. it enables surplus and idle funds to be used more effectively, efficiently and productively.  
  6. Increased Investment : The capital market facilitates lending to the businessmen and government an d thus encourage investment. It provides long term finance through special institutions and banks with the development of financial institutions. Capital becomes more mobile, decreases interest rates and increases investment. 
  7. Accelerate Economic Growth : Capital market by providing long term finance to industries helps for economic development of the country . It makes proper allocation of resources rationally in accordance with development needs of the country, which promotes economic growth of the country.
  8. Stabilizes the Security Prices : Capital market stabilizes the security prices and avoids fluctuations of security prices by providing easy mobility of funds from place to place. 
  9. Safeguards Interest of the Investors : Capital Market benefits the investors in various ways,
    1. It links the busyers and sellers of securities,
    2. Provides the information regarding the prices of various securities.
    3. It safegurards the interest of the ivestors by compensating them from stock Exchange Compensation Fund in the even of failure or default.
    4. It provides better returns to the investors by offering various alternatives in the portfolio investments. 

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