CAPITAL

MARKET
By:-
GARIMA YADAV
L.L.M 1ST YEAR (1st Semester)
 ACKNOWLEDGEMENT

It is a pleasant duty on the part of mine to acknowledge my debt of gratitude to my

teacher Dr. P.P MITRA, who had been a source of encouragement for the
preparation of this project.

--GARIMA YADAV
 CONTENTS

DEFINATION OF CAPITAL MARKET .................................................................4

WHAT ARE CAPITAL MARKET ...........................................................................5

BREAKING DOWN MONEY MARKET FUND .............................................9

FEATURES OF CAPITAL MARKET .....................................................................9

DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET ......11

CONCLUSION ........................................................................................................14
Definition of Capital Market:-

The term "Capital Market' refers to facilities and institutional arrangements for the
borrowing and lending of long-term funds. The emphasis is chiefly on the markets for
long-term debt and equity claims stocks, bonds, mortgages and other evidences of long
term debt.1 But in broad sense "the Capital market may be said to consist of a series of
channels-through which the savings of the community are made available for industrial
and commercial enterprises and for public.

A type of financial market where the government or company securities are created and
traded for the purpose of raising long-term finance to meet the capital requirement is
known as Capital Market.

The securities which are traded includes stocks, bonds, debentures, euro issues, etc.
whose maturity period is not limited up to one year or sometimes the securities are
irredeemable (no maturity). The market plays a revolutionary role in circulating the
capital in the economy between the suppliers of money and the users. The Capital Market
works under full control of Securities and Exchange Board to protect the interest of the
investors.

The Capital Market includes both dealer market and auction market. It is broadly divided
into two major categories: - Primary Market and Secondary Market.

Primary Market: A market where fresh securities are offered to the public for
subscription is known as Primary Market.

Secondary Market: A market where already issued securities are traded among investors
is known as Secondary Market.

1
Robinson, I. Roland, "Money and Capital Markets' (1964) McGraw-Hill Book Company, New York, p. 65
What are Capital Markets?

Capital markets are markets for buying and selling equity and debt instruments. Capital
markets channel savings and investment between suppliers of capital such as retail
investors, institutional investors, and users of capital like businesses, government and
individuals. Capital markets are vital to the functioning of an economy since capital is a
critical component for generating economic output. Capital markets include primary
markets, where new stock and bonds issues are sold to investors, that is new issue share
market and secondary markets, which trade existing securities. That is old and existing
market. 2

Companies may enter the capital market to raise money for: -

1. Setting up of new project.

2. Expenditure on diversification of existing project.
3. Normal capital expenditure for modernization.
4. Merger amalgamation of companies.
5. Capital restructuring.
6. Listing of securities.3

Capital markets have numerous participants including individual investors, institutional

investors such as mutual fund and pension funds, municipalities and governments,
companies and organizations, financial institutions and banks. While many different
kinds of groups including governments, may issue debt through bonds these are said to be
government bonds. Governments may not issue equity through stocks. Suppliers of
capital generally want the maximum possible out put (return) at the lowest possible risk,
while users of capital want to raise capital at the lowest possible cost in market.4

2
http://www.investopedia.com/terms/c/capitalmarkets.asp
3
Sanjiv Agarwal ( chartered accountant), guide to Indian capital market, Pg. 81, Bharat law house, first edition
2000, price Rs. 750
4
http://www.investinganswers.com/financial-dictionary/investing/capital-markets-1429
A capital market is not a compact unit, but a highly decentralized system made up of
three major parts:

1. Stock market.

2. Bond market.

3. Money market.

It also works as an exchange for trading existing claims on capital in the form of shares.5

STOCK MARKET:-
A stock market, equity market or share market is the aggregation of buyers and sellers
that is a loose network of economic transactions, not a physical facility or discrete entity
of stocks also called shares, which represent ownership claims on businesses; these may
include securities listed on a public stock exchange as well as those only traded privately.
Examples of the latter include shares of private companies which are sold to investors
through equity crowd funding platforms. Stock exchanges list shares of common equity
and other security e.g. corporate bonds and convertible bonds.6

It can operate only if it is recognized by the government under the securities contract
regulation act, 1956. The recognition is granted under section 3 of the act by the central
government, ministry of finance.7

India has two major stock exchanges- National Stock Exchange of India (NSE) and
Bombay Stock Exchange of India (BSE). Most of Indian equity share trading market
takes place on these two stock exchanges.

5
http://www.businessdictionary.com/definition/capital-market.html
6
https://en.m.wikipedia.org/wiki/Stock_market
7
V.A.Avadhani, Book investment and securities markets in india, Pg.241, publish himalaya publishing house, 9th
Edition, price Rs.390.
BOMBAY STOCK EXCHANGE:-
The BSE, Asia's first stock exchange, was established in 1875. BSE is one of the world's
fastest stock exchanges, with a median trade speed of 6 microseconds. is the world's 11th
largest stock exchange with an overall market capitalization of $1.83 Trillion as of
March, 2017. More than 5500 companies are publicly listed on the BSE.

NATIONAL STOCK EXCHANGE OF INDIA:-

The NSE, on the other hand, was founded in 1992 and started trading in 1994, as the first
demutualized electronic exchange in the country. It was the first exchange in the country
to provide fully a modern, automated screen-based electronic trading system which
offered easy trading facility to the investors spread across the length and breadth of the
country. The NSE has a total market capitalization of more than US$1.41 trillion, making
it the world's 12th-largest stock exchange as of March 2016. Both exchanges - BSE and
NSE - follow the same trading mechanism, trading hours, settlement process, etc.

BOND MARKET:-
The bond market also known as debt market or credit market. Bond market is a financial
market where participants can issue new debts, known as the primary market (new issue
share market), or buy and sell debt securities, known as the secondary market. This is
usually in the form of bonds, but it may include notes, bills, and so on.8

MONEY MARKET:-

The money market is where financial instruments with high liquidity and very
short maturities are traded. It is used by participants as a means for borrowing and
lending in the short term, with maturities that usually range from overnight to just under a
year. Among the most common money market instruments are Eurodollar deposits,
negotiable certificates of deposits (CDs), bankers acceptances, U.S. Treasury
bills, commercial paper, municipal notes, federal funds and repurchase agreements.9

8
https://en.m.wikipedia.org/wiki/Bond_market
9
http://www.investopedia.com/terms/m/moneymarket.asp
Definition of Money Market:-
An unorganized arena of banks, financial institutions, bill brokers, money dealers, etc.
wherein trading on short-term financial instruments is being concluded is known as
Money Market. These markets are also known by the name wholesale market.

Trade Credit, Commercial Paper, Certificate of Deposit, Treasury Bills are some
examples of the short-term debt instruments. They are highly liquid (cash equivalents) in
nature, and that is why their redemption period is limited to one year. They provide a low
return on investment, but they are quite safe trading instruments.

Money Market is an unsystematic market, and so the trading is done off the exchange, i.e.
Over the Counter (OTC) between two parties by using phones, email, fax, online, etc. It
plays a major role in the circulation of short-term funds in the economy. It helps the
industries to fulfill their working capital requirement.

Money market instruments:-

a) 182 Treasury bills: - these were introduced by RBI in November, 1986.

b) Commercial bills: - commercial bill can be traded by offering bills for

rediscounting by the investors.

c) Certificate of deposit: - it is negotiable instrument issued at a discount and the face

value is payable on maturity.

d) Commercial papers: - the issue of commercial papers is governed by RBI and its
guidelines change from time to time as per prevailing monetary policy.

e) call money, term money and notice money:- call and short notice money deal with
one day or 14 days money at a market rate of interest.10

10
Sanjiv Agarwal ( chartered accountant), guide to Indian capital market, Pg.100, Bharat law house, first edition
2000, price Rs. 750
BREAKING DOWN Money Market Fund'

A money market fund's purpose is to provide investors with a safe place to invest easily
accessible, cash-equivalent assets. It is a type of mutual fund characterized as a low-risk,
low-return investment. Since money market funds have relatively low returns, investors
such as those participating in employer-sponsored retirement plans, might not want to use
money market funds as a long-term investment option because they will not see the
capital appreciation they require to meet their financial goals.11

What are the main Features of a Capital Market?

Capital market is a market for medium and long term funds. It includes all the
organizations, institutions and instruments that provide long term and medium term
funds. It does not include the instruments or institutions which provide finance for short
period (up to one year). The common instruments used in capital market are shares,
debentures, bonds, mutual funds, public deposits etc.12

Features:-
1. Link between Savers and Investment Opportunities:- Capital market is a crucial
link between saving and investment process. The capital market transfers money
from savers to entrepreneurial borrowers.

2. Deals in Long Term Investment:- Capital market provides funds for long and
medium term. It does not deal with channelizing saving for less than one year.

3. Utilizes Intermediaries:- Capital market makes use of different intermediaries such

as brokers, underwriters, depositories etc. These intermediaries act as working
organs of capital market and are very important elements of capital market.

11
http://www.investopedia.com/terms/m/moneymarket.asp#ixzz4qb606eeV
12
https://www.linkedin.com/pulse/what-main-features-capital-market-pac-group-of-colleges
 4. Determinant of Capital Formation:- The activities of capital market determine the
rate of capital formation in an economy. Capital market offers attractive
opportunities to those who have surplus funds so that they invest more and more in
capital market and are encouraged to save more for profitable opportunities.

5. Government Rules and Regulations:- The capital market operates freely but under
the guidance of government policies. These markets function within the
framework of government rules and regulations.

An ideal capital market is one:-

1. Where finance is available at reasonable cost.

2. Which facilitates economic growth.

3. Where market operations are free, fair, competitive and transparent.

4. Must provide sufficient information to investors.

5. Must allocate capital productively.

Difference Between Money Market and Capital Market

The financial market is a marketplace where investors deal in financial instruments. It

provides a vehicle for allocation of savings to investment. It can be grouped as money
market and capital market. Both the markets are very important in the financial sector. In
the money market, extremely liquid financial instruments are traded, i.e. monetary
instruments of short-term nature are dealt. On the contrary, the capital market is for long
term securities. It is a market for those securities which have direct or indirect claims to
capital.13

Capital Market plays a crucial role in the development of the economy because it
provides channels for mobilization of funds. On the other hand, money market possesses
a range of operational features. The article presented to you explains the difference
between money market and capital market in tabular form.

13
http://keydifferences.com/difference-between-money-market-and-capital-market.html#ixzz4qb7NRSOl
Comparison Chart:-
BASIS FOR MONEY MARKET
COMPARISON
Meaning A segment of the financial
market where lending and
borrowing of short term
securities are done.
Nature of Market Informal
Financial instruments Treasury Bills, Commercial
Papers, Certificate of
Deposit, Trade Credit etc.
Institutions Central bank, Commercial
bank, non-financial
institutions, bill brokers,
acceptance houses, and so
on.
Risk Factor Low
Liquidity High
Purpose To fulfill short term credit
needs of the business.
Time Horizon Within a year
Merit Increases liquidity of funds
in the economy.
Return on Investment Less
CAPITAL MARKET
A section of financial market
where long term securities
are issued and traded.
Formal
Shares, Debentures, Bonds,
Retained Earnings, Asset
Securitization, Euro Issues
etc.
Commercial banks, Stock
exchange, non-banking
institutions like insurance
companies etc.
Comparatively High
Low
To fulfill long term credit
needs of the business.
More than a year
Mobilization of Savings in
the economy.
Comparatively high
Key Differences Between Money Market and Capital Market

The following points are substantial, as far as the difference between money market and
capital market is concerned:-

1. The place where short-term marketable securities are traded is known as Money
Market. Unlike Capital Market, where long-term securities are created and traded
is known as Capital Market.

2. Capital Market is well organized which Money Market lacks.

3. The instruments traded in money market carry low risk, hence, they are safer
investments, but capital market instruments carry high risk.

4. The liquidity is high in the money market, but in the case of the capital market,
liquidity is comparatively less.

5. The major institutions that work in money market are the central bank,
commercial bank, non-financial institutions and acceptance houses. On the
contrary, the major institutions which operate in the money market are stock
exchange, commercial bank, non-banking institutions etc.

6. Money market fulfills short term credit requirements of the companies such as
providing working capital to them. As against this, the capital market tends to
fulfill long term credit requirements of the companies, like providing fixed capital
to purchase land, building or machinery.

7. Capital Market Instruments give higher returns as compared to money market

instruments.

8. Redemption of Money Market instruments is done within a year, but Capital

Market instruments have a life of more than a year as well as some of them is
perpetual in nature. 14

14
http://keydifferences.com/difference-between-money-market-and-capital-market.html#ixzz4qb7NRSOl
CONCLUSION:-
The main aim of the financial market is to channelize the money between parties in
which Money Market and Capital Market helps by taking surplus money from the lenders
and giving them to the borrower who needs it. Millions of transactions take place around
the world on a daily basis.

Both of them work for the betterment of the global economy. They fulfill the long term
and short term capital requirements of the individual, firms, corporate and government.
They provide good returns which encourage investments.15

15
http://keydifferences.com/difference-between-money-market-and-capital-market.html#ixzz4qb9yCojn