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Capital Market- Functions and Types

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Financial markets are places where buying and selling of assets take place. There are two types of financial markets based on the kind of assets traded. They are 1) Money Market and 2) Capital Market.

Money markets are for raising short term funds, while Capital markets deal with long term investments.

Capital Market

Capital markets are those market where trading of assets such as bonds, equity and securities take place. Capital markets deal with financial instruments that are having a lock-in period of more than one year.

Capital Market – Functions

  • Mobilising of savings in order to finance investments of long duration.
  • Security trading is facilitated.
  • Minimizing information and transaction cost.
  • Productive assets ownership is encouraged.
  • Rapid evaluation of financial instruments like debentures and shares
  • Transaction settlement is done quickly, adhering to pre-determined time schedules.
  • With the help of competitive price mechanism, the effectiveness of capital allocation is improved.
  • Derivative trading offers insurance against risks in the market
  • Security trading made easier for companies and investors.

Capital Market – Types

Based on the nature of the assets that are traded in the capital market, there are two types of capital market 1)Primary Market and 2) Secondary Market. These are discussed in the following lines.

Primary Market: It is the most important of the capital markets; it is also called as the new issues market as it deals with securities that are issued for the first time. The primary market helps in the creation of capital for companies, institutions and governments. It also assists investors in providing funding for new projects.

In such a market, you can find both initial and further public offering. Funds deployment is done by offering through assistance in the form of a preferential issue, prospectus, e-IPO, rights issue, and private placement of securities.

Secondary Market: This market deals with trading of already issued securities which can be in the form of bonds, debentures, bills and shares. The secondary market is popularly known as the stock market. Here trading takes place between the investors of securities.

Some instances of secondary markets are the New York Stock Exchange, NASDAQ, London Stock Exchange, etc.

To learn more about financial markets and related topics like stocks, dividends and consumer protection, stay tuned to BYJU’S.

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