A capital market is a systematic and organized market place where enterprise (corporation and pension funds) and individuals deal and exchange debt and equity securities. For an organization, the capital market is a prime source of producing funds where the firm’s trade their securities to pay its liabilities and equity to investors.
It is similar to the financial market where the company or government securities are generated and patronized for the intention of establishing long-term finance to coincide the capital necessary.
The nature of the capital market is risky markets. Therefore, it is not used for short-term funds investment. Most of the investors obtain the capital markets to preserve for education or retirement.
In other words, the capital market is meant for the trading and issuance of long-term securities. There are two types of capital market (i)primary market and (ii)secondary market. When a public company trades its securities in the capital markets, it is known as a primary market activity. The consecutive trading of the firm’s securities between investors and customers is called secondary market activity.
Functions of Capital Market
Capital market is one of the sources to strength a firm’s economy. It is considered as one of the best sources of finance and offers a wide range of investment methods to the investors, resulting in generating capital in the economy.
The few essential functions of the capital market are as follows.
- It mobilizes savings into long term investments
- Promotes security trade
- Minimizes information cost and transaction
- Stimulates array of productive assets ownership
- It evaluates shares and debentures financial instruments
- Simplifies transaction settlement at a given time
- Through derivative trading, it offers insurance against price risk or market
Advantages of Capital Market
Some benefits of the capital market are
- It enhances the effectiveness of transactions
- It transfers funds between the investors, such as between individuals who supply capital and who need the capital
- The secondary markets generate liquidity in the market
- Securities, for instance, shares pay dividend income
- Possession of a few securities ensures the finest long-term performance
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