Ques. What do you mean by capital mkt. ? Discuss its importance and role.

Ans. The capital market is the market for securities, where companies and the government
can raise
long-term funds. The capital market includes the stock market and the bond market. Financial
regulators, such as the U.S. Securities and Exchange Commission, oversee the capital
markets in their
designated countries to ensure that investors are protected against fraud. The capital markets
consist of
the primary market, where new issues are distributed to investors, and the secondary market,
where
existing securities are traded.
The capital market, we are told, is the framework, which facilitates the transfer of claims to
financial assets between economic units. The Stock Market is the most visible sign of the
capital
market though, contrary to popular belief, the stock exchange does not provide capital; what
it
provides is a market for the resale of transferable securities. In an economy with a very large
informal
sector, an informal capital market would also be expected to exist. At this forum, however,
we shall
understandably focus on the formal capital market, though one of the goals of policy would
be to
absorb all or as much as possible of such an informal capital market where it exists.
ROLE OF CAPITAL MARKET :
The role of capital market operators in an economy would also naturally derive from the role
of the
capital market itself in the economy. Capital market A capital market is a market for long-
term
securities (equity and debt). The purpose of capital market is to
(i) mobilize long-term savings to finance long-term investments;
(ii) provide risk-capital in the form of equity or quasi-equity to entrepreneurs;
(iii) encourage broader ownership of productive assets;
(iv)provide liquidity with mechanism enabling the investor to sell financial assets;
(v) lower the costs of transactions and information; and
(vi)improve the efficiency of capital allocation through a competitive pricing mechanism.
(vii)Issue of 'primary securities' in the 'primary market', that is, directing cash flow from the
surplus
sector to the deficit sectors such as the government and the corporate sector.
(viii)Issue of 'secondary securities' in the primary market, that is, directing cash flow from the
surplus
sector to financial intermediaries such as banking and non-banking financial institutions.
(ix)'Secondary market' transactions in outstanding securities which facilitate liquidity. The
liquidity of
the stock market is an important factor affecting growth. Many profitable projects require
long-term
finance and investment which means locking up funds for a long period. Investors do not like
to
relinquish control over their savings for a long time. Hence, they are reluctant to invest in
longgestation
projects. It is the presence of the liquid secondary market that attracts investors because it
ensures a quick exit without heavy losses of costs.
Hence, the development of an efficient capital market is necessary for creating a climate
conductive
to investment and economic growth.
A capital market can be further classified into primary and secondary markets. The primary
market
is meant for new issues and the secondary market is a market where outstanding issues are
traded. In
other words, the primary market creates long-term instruments for borrowings, whereas the
secondary
market provides liquidity through the marketability of these instruments. The secondary
market is also
known as the stock market.
IMPORTANCE OF CAPITAL MARKET :
(i) Disseminate information efficiently for enabling participants to develop an informed
opinion about
investment, disinvestments, reinvestment, or holding a particular financial asset.
(ii) Enabling quick valuation of financial instruments-both equity and debt.
(iii)Providing insurance against market risk or price risk through derivative trading and
default risk
through investment protection fund.