Capital market helps commercial development of the country by meeting the long-term capital requirement of firms. It is a market for medium and long-term funds. It channelizes savings into investment or productive use. It intermediates flow of savings of those who save a part of their income to those who wants to invest it in productive assets
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The term capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It consists of a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general.
The main functions of capital market are:
There are two types of capital market:
Primary market is the place where a company publicly sells new stocks and bonds for the first time. This market is also called new issues market. The new issue takes the form of an initial public offering (IPO) or Follow-on Public Offer (FPO). The companies use these funds for investment in building, plants and machinery etc. It helps in setting up of new business unit or expansion of existing business. Thus, it helps in capital formation of the country.
Initial Public Offering (IPO): IPO is a process by which a company issues shares to the public for the first time to raise money. After IPO process is over, the company gets listed on stock exchange and starts trading publicly.
Follow-on Public Offer (FPO): The subsequent issuance of shares by the company is called FPO. The FPO is issued after IPO. The company issues further shares to public to seek additional funding.
The secondary market is a place where securities are traded after the company has sold its offering on the primary market. It is commonly referred as stock market. In this market, securities are not directly issued by the company to investors. The securities are sold by existing investors to other investors. The sale and purchase are generally done through stock exchange.
The companies do not get additional capital in this market as securities are bought and sold between investors only so there is no direct capital formation. It provides liquidity to securities.
A stock exchange lists the securities issued by companies. It refers to exchange of stocks between buyers and sellers. Its function is to provide ready and continuous market for securities. It is defined as an organisation established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities. A stock exchange is situated at particular location.
The main function of stock exchange is:
There are 24 stock exchanges in India. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are stock exchanges where most of the trading in the Indian stock market takes place.
The common instruments used in capital market are:
The Share also referred as Stock is the fractional ownership in Company. The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as ‘shares. There are two kinds of shares can be issued by a company:
The debenture is debt instrument issued by companies to borrow money for expansion. It is issued as certificate containing date of redemption and amount of repayment mentioned on it. It carries fixed rate of interest payable half-yearly or yearly basis. The company have to pay interest on debentures even if it is in loss, thus is in expense for the company. The debenture holders do not enjoy ownership rights over the company. They are creditors of company.
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