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What is Capital Market | Functions and Types of Capital Market

Financial markets include a wide range of places where people and organizations exchange assets, securities and contracts with each other, and are often secondary markets. The capital market is primarily used to raise funds to be used for the operation or development of a company. Capital market is called capital market in English. In this article, we will know what is capital market and what are the functions and types of capital market.

What is Capital Market | Functions and Types of Capital Market

What is Capital Market

Capital markets are places where savings and investments are managed between suppliers who have capital and those who need capital. Entities that have capital include retail and institutional investors. Whereas the people who need capital include businessmen, governments and common people.

Capital markets are made up of primary and secondary markets. Primary markets are those where new securities are issued and sold, while secondary markets are those where already issued securities are traded among investors. These markets bring together people who have and want capital, and provide a place where institutions exchange securities.

Capital market is a planned market where both business organizations (corporations and pension funds) and individuals exchange and sell equity securities and debt. It is expected to be a capital market for the distribution and exchange of long-term securities. Here long-term investment means those with a lock-in period of more than one year.

Sometimes, the government also engages in the capital market, especially by distributing long-term bonds. Since the government is not allowed to issue shares and equity securities.

Functions of Capital Market

  1. Converting Savings to Long Term Investments
  2. Reducing information costs and transactions
  3. expedite trading of securities
  4. Motivate the owner of productive assets
  5. Provide insurance on value and market risk through secondary trading
  6. Quick valuation of financial instruments like debentures and shares
  7. Settlement of transactions at a particular given time or time

Types of Capital Market

1. Primary Market

Also known as the new issue market, it is the first market trading of new securities and later available to institutions and individuals. It supports both private and public offerings. An organization provides securities to the public to deposit money and meet its long-term goals.

In the primary market, securities are issued by either an initial public offering (IPO) or a further public offering (FPO). IPO is a process through which an organization can make a public offering to investors for the first time. This trade takes place between the investors and the original issuer in the primary market.

2. Secondary Market

It is called secondary because the securities they hold are old and have already been issued for trading in the primary market. This trade takes place between the investors and the original issuer in the primary market. Trading takes place between buyer and seller and stock exchange facility.

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