If you are a novice at investing, this article on capital market basics is a must-read. The capital market functions as a critical link between savers and investors.
So, what is a capital market? A capital market is a market for the trading of long-term investments. In other words, it is a marketplace for investments that have a lock-in period greater than a year, or their maturity period is at least more than one year.
The capital market involves the sale and purchase of both equity and debt instruments, including equity shares, debentures, preference shares, secured premium notes, and zero-coupon bonds. It also caters to all forms of lending and borrowing financial transactions.
Let’s learn more about capital markets and explore its functionality. A capital market helps in the mobilisation of savings for financing long-term investments. It also aids in the trading of securities. Also, a capital market reduces transaction and information costs by encouraging the ownership of a broad spectrum of productive financial assets. It facilitates the quick valuation of shares and debentures.
One of the primary functions of a capital market is providing insurance against market volatility and price risk through derivative trading. One of the best things about capital market is also that it offers a wide range of investment instruments to investors, thereby fostering the creation of capital in the economy.
Security transactions in a capital market are undertaken by participants including both individual entities as well as business institutions. As part of capital market basics, let’s cover the types of capital markets. The capital markets are mainly of two types-Primary and Secondary capital markets.
Primary capital market: In this type of capital market, companies, governments, and public-sector institutions can raise funds through issued bonds. The primary capital market consists of corporations that raise money through the selling of new stocks through an initial public offering (IPO). Therefore, in a primary capital market, investors directly purchase shares from a company. Primary markets are characterised by the trade of new issues of stocks and other securities.
Secondary capital market: In the secondary capital markets, financial and investment instruments such as stocks, shares, and bonds, among others, are purchased and sold by customers. In a secondary capital market, the chief feature is the exchange and trade of existing or previously-issued securities. Stock exchanges such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are examples of secondary capital markets.
Accelerated capital formation, mobilisation of savings, generating long-term capital, the advancement of industrial and economic growth, dynamic channelling of funds, and well-boosted generation of foreign capital are some of the many advantages of capital markets. The existence of the capital market encourages people to invest in productive investment channels, in turn, stimulating industrial and economic development.
Now that you are aware of what is a capital market and know the basics, it is time to start investing by carefully analysing capital markets and predicting their future movements.