Capital Market
Capital markets facilitate the efficient flow of financial resources between investors and entrepreneurs in both private and public sectors.
According to T. Parikh, the capital market includes all financial instruments, both short-term and long-term, as well as commercial, industrial, and government documents.
The capital market is often regarded as the market for long-term financing. The capital market offers long-term debt and equity financing to the government and business sectors.
Objectives of Capital Market
In 1955, the then-Finance Minister addressed in the Lok Sabha on the aims of the capital and securities market as follows:
A well-regulated and efficient capital market provides significant economic benefits to countries with a big private sector.
An structured securities market is essential for providing marketability and price consistency for shares, which investors want.
Second, only such a market can provide fairness and safety while purchasing and selling stocks.
A well-organized stock market helps determine the true value of assets by balancing supply and demand.
Finally, the stock market facilitates the efficient allocation of funds among various competing investments by evaluating securities.
Importance of Capital Markets
The industrial revolution enabled mass manufacturing, which requires vast capital that can be obtained via the company form of organization, and the company form of organization resulted in the establishment of security markets.
The security market, also known as the capital market, is crucial for accelerating industrial expansion and channeling the savings of those who want to invest rather than start their own businesses.
On the other side, security markets assist entrepreneurs in launching ventures that are above their financial capabilities. Thus, the security market serves as a connecting link between economically deficient and economically surplus entities. A healthy, efficient, and transparent security market is consequently critical for industry and economic progress.
Both emerging and established nations need funding for economic development and growth. These monies come from excess economic units, or savers. A savings surplus unit is defined as a firm, family, Central Government, State Government, or local self-government that has more savings than consumption during a certain time.
On the other hand, some economic units are in deficit, meaning their spending or investment exceeds their present revenue.
If the investment equaled the present savings of all units in an economy, no economic unit would need to seek financing from financial markets. In a contemporary economy, there is a difference between investment and consumption demands and income.
Some organizations save more than they invest. Some people invest more than they save. The capital or financial market is required to facilitate the movement of cash from surplus to deficit units, allowing deficit units to efficiently employ their reserves.
A rupee saved is of little benefit to a nation if it is not invested soon. Money does not generate anything unless it is converted into capital, or invested in capital products. After investing in productive sectors, the national product or per capita income increases, as does the average person’s level of life.
Households in rural, urban, and metropolitan regions contribute significantly to savings. Their investment criteria vary substantially, with the majority of investments made in the government, semi-government, and business sectors.
The transfer of savings from the household sector to these sectors needs the mobilization of funds. The capital market promotes the transfer of cash from surplus to deficit units.
Economic growth depends on long-term investment and capital generation. And capital production is dependent on the mobilization, augmentation, and channelization of investable money.
The capital market is particularly important since it pools the country’s financial resources and makes them accessible to innovative investors. Well-developed financial markets supplement resources by soliciting and lending cash on a worldwide basis.
Technological advancements, economies of scale, and other reasons have led to larger industrial units and corporate enterprises, making it difficult for individuals to satisfy investment needs with their limited cash.
A developed capital market may address the issue of a lack of finances. An structured capital market can mobilize and combine even tiny and dispersed deposits, increasing the availability of investable money.
While the fast rise of joint stock firms has been facilitated in large part by the expansion of capital markets, the expansion of joint stock businesses has also promoted the development of capital markets. A developed capital market offers a variety of attractive investment alternatives to modest savers.
Functions of Capital Markets
The operations of the financial market, which includes the capital and money markets, entail the exchange of one financial asset for another. For example, surplus economic units exchange money for another financial asset that gives future returns in the form of interest, dividends, and capital appreciation. They connect depositors and borrowers together by selling securities to savers and lending the proceeds to borrowers.
The efficiency of the financial market is determined by how well the flow of money is controlled in an economy. According to Prof. Schimpeter’s book “The Theory of Economic Development,” entrepreneurship requires the transfer of buying power to the individual.
It is equally crucial that the financial market encourages people to become entrepreneurs while also motivating individuals and organizations to save more.
Capital and money markets are the tools of distributing funds in the most desirable manner, allowing us to attain the intended national goals and priorities. This allows for more efficient production of goods and services, which benefits society and enhances the quality of life of not just borrowers but also others in the economy.
Financial markets accomplish this purpose by directing the nation’s savings to the most productive uses feasible, hence increasing production and employment.
The correct development and expansion of financial markets is critical for the economy’s rapid growth. To fulfill the expanding financial requirements of a developing economy, financial ark should expand at a quicker pace.
Furthermore, it needs to be more efficient and diverse. Van Home accurately said in his book Financial Management and Policy. The more diverse the means by which money may be transferred from ultimate savers to ultimate consumers of funds, the more effective an economy’s financial markets are.
Financial markets meet the demands of both savers and borrowers. In financial markets, many financial products are purchased and traded on a daily basis. These products vary in terms of liquidity, marketability, maturity, risk, return, and tax implications, among other factors. Investors have different views on risk, return, and liquidity.
Furthermore, investors like to have a more diverse investment portfolio. As a result, the larger the variety of financial instruments in a financial market, the more efficient it will be to generate and convert savings into investments.
The financial markets not only facilitate the movement of savings into new industries, but they also give options for financial investment in order to make income on excess. In other words, these marketplaces serve both financial and non-financial purposes.
Financial markets allow the financing of both physical capital development and consumer expenditures. Financial markets regulate the movement of cash between savers and investors, including institutional investors.
Individuals, institutions, the federal government, the state government, the local self-government, and the private business sector all want long-term funding. Funds are raised by issuing shares, debentures, and bonds, which form the new issue market.
In addition to generating money directly from depositors, deficit units seek long-term financing from governmental financial institutions and investment institutions. Individuals, institutions, banks, and industrial financial institutions provide for the majority of money supply.
The capital market plays an important role in the financial system. Savings and investments are critical to an economy’s growth. In general, units that save and invest are not the same; the capital market serves as a bridge between surplus units’ saves and deficit units’ long-term investments.
The rate of long-term investment and capital creation in a nation, among other factors, determines the speed of economic growth. The rate of capital production is determined by the pace of savings, investment, and financial markets.
The capital market is critical in mobilizing funds and making them accessible to ambitious investors. The main capital market assists governments and industrial companies in raising funding by issuing different types of securities. The secondary market offers liquidity for outstanding securities.
An active capital market employs its pricing mechanism to distribute limited financial resources to the most productive applications at the lowest cost. Funds are allocated via incentives and punishments.
Larger and more efficient companies often have lower capital costs due to lower risk associated with their securities. Shares of high-growth corporations fetch a premium in the market, while low-performance companies have difficulty selling their securities and may need to issue securities at a discount to obtain more capital. Specified shares are more desirable than non-specified shares.