CAPITAL MARKET A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments

can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year The market where investment funds like bonds, equities and mortgages are traded is known as the capital market. The primal role of the capital market is to channelize investment from investors who have surplus funds to the ones who are running a deficit. The different types of financial instruments that are traded in the capital markets are equity instruments, credit market instruments, insurance instruments, foreign exchange instruments, hybrid instruments and derivative instruments The capital market is an important constituent of the financial system. It is a market for longterm funds, both equity and debt and funds raised within and outside the country. The capital market aids economic growth by mobilizing the savings of the economic sectors and directing the same towards channel of productive uses. Primary Capital Market and Secondary Capital Market The capital market comprises of the primary capital market and the secondary capital market. Primary Market: Primary Market comprises of the new securities which are offered to the public by new companies. It is the mechanism through which the resources of the community are mobilized and invested in various types of industrial securities. Whenever a new company wants to enter the market it has to first enter the primary market. Primary market refers to the long term flow `of the funds from the surplus sector to the government and the corporate sector (through primary issues) and to banks and non- bank financial intermediaries (through secondary issues). Primary issues of the corporate sector lead to the capital formation, (creation of net fixed assets and incremental change in inventories) Secondary Market: The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. Secondary market is a market for outstanding securities. An equity instrument, being an eternal fund, provides an all- time market while a debt instrument, with a defined maturity period, is traded at the secondary market till maturity. Unlike the primary issues in the primary market, which result in capital formation, the secondary market provides only liquidity and the marketability of outstanding debt and equity instruments. The secondary market contributes to economic growth by channelizing funds into the most efficient channel through

the process of disinvestment to reinvestment. The secondary market also provides instant valuation of securities (equity and debt) made possible by changes in the internal environment, that is, through companywide and industry wide factors. INTERMEDIARIES IN CAPITAL MARKET Capital market requires many intermediaries who are responsible to transfer funds from those who save to those who require these funds for investments. The efficiency of the markets is dependent on the specialization attained by these intermediaries. Some of them are as follows: 1. Stock Exchanges. 2. Banks. 3. Investment Trusts and Companies. 4. Specialized Financial Institutions or Development Banks. 5. Mutual Funds. 6. Non-Banking Financial Institutions. CLASSIFICATION OF INDIAN CAPITAL MARKET DEBT MARKET

COMMODITIES

EQUITY MARKET

INDIAN CAPITAL MARKET

DERIVATIVES

MUTUAL FUNDS

INVESTORS IN CAPITAL MARKET

The supply in this market comes from savings from different sectors of the economy. These savings accrue from the following sources 1. Individuals. 2. Corporate. 3. Governments. 4. Foreign countries. 5. Banks. 6. Provident Funds. 7. Financial Institutions. All these entities contribute to savings in the economy part of these savings naturally flow in the capital markets. Individuals invest in these markets directly by investing in shares or debentures of companies through bond issues of public sector units or through mutual funds. Corporate who have more savings than their requirement for funds also are participants in this market.
Methods of Raising Capital

Debentures

Preference Shares

fresh issue

public bond public deposit loan from bank and ifs

- Equity shares

Public

Private Placements

Rights Issue

IPO

FPO

Let us get acquainted with the important functions and role of the capital market. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy

Capital Market India

The Indian Equity Markets and the Indian Debt markets together form the Indian Capital markets The Indian Equity Market depends mainly on monsoons, global funds flowing into equities and the performance of various companies. The Indian Equity Market is almost wholly dominated by two major stock exchanges -National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE). The benchmark indices of the two exchanges - Nifty of NSE and Sensex of BSE are closely followed. The two exchanges also have an F&O (Futures and options) segment for trading in equity derivatives including the indices. The major players in the Indian Equity Market are Mutual Funds, Financial Institutions and FIIs representing mainly Venture Capital Funds and Private Equity Funds. Indian Equity Market at present is a lucrative field for investors. Indian stocks are profitable not only for long and medium-term investors but also the position traders, short-term swing traders and also very short term intra-day traders. In India as on December 30 2007, market capitalisation (BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching well with other emerging economies and selected matured markets. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies. How do the debt markets impact the economy? 1. Increased funds for implementation of government development plans. The government can raise funds at lower costs by issuing government securities. 2. Conducive to implementation of a monetary policy. 3. Less risk compared to the equity markets, encouraging low-risk investments. This leads to inflow of funds into the economy. 4. Higher liquidity and control over credit. 5. Opportunity for investors to diversify their investment portfolio. 6. Better corporate governance. 7. Improved transparency because of stringent disclosure norms and auditing requirements.

SBI DFHI Limited is trading in equities and equity derivatives after RBI allowed stand-alone PDs to diversify their activities in 2006. It remains an active participant in the Indian debt market. Through SBI DFHI Invest Plus, investors can purchase investment grade Corporate Bonds for their portfolio (details available on the website).