Capital Markets: Meaning, Function & Types of Capital Market

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Capital Market can be defined as a market for financial assets which have a long or indefinite maturity. The capital market instruments become mature for the period above one year unlike Money Market instruments. In other words, it can be understand as an institutional arrangement to borrow and lend money for a longer period of time. There are many financial institutions that play the role of lenders in the capital market. There are various instruments that are involved in Capital market which can be used for financial transactions.

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We can further classify Capital market into primary and secondary markets. The primary market refers to the market for new shares whereas as in the secondary market the existing securities are traded. One of the important role of Capital Market is in mobilizing the resources, and diverting them in productive channels. In this way, it facilitates and promotes the process of economic growth in the country.

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Functions and significance of capital market

Given below are the various Functions and Significance of the Capital Market:

Provide the Link between Savers and Investors:

One of the main function of the capital market is that it provide a link between savers and investors. The perform the task of mobilizing the savings and diverting them in productive investment. In other words we can say that the capital market plays a vital role in transferring the financial resources from surplus and wasteful areas to deficit and productive areas, thus increasing the productivity and prosperity of the country.

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Gives Encouragement to Saving:

Capital Market gives an encouragement to savings as the banking and non-banking institutions provide facilities, which encourage people to save more. If we consider the under developed countries, the absence of the capital market, can result in very little savings and those who save often invest their savings in unproductive and wasteful directions, i.e., in real estate (like land, gold, and jewellery) and conspicuous consumption.

Gives Encouragement to Investment:

The capital market also gives encouragement to Investment as it facilitates lending to the businessmen and the government and thus encourages investment. Along with the above mentioned role, it also provides facilities through banks and non-banking financial institutions. There are various financial assets, e.g., shares, securities, bonds, etc., that help to induce savers to lend to the government or invest in industry.

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It Promotes Economic Growth:

The capital market help to promote the economic growth of a country as well as it also reflects the general condition of the economy and smoothens and accelerates the process of economic growth. The various institutions of the capital market helps in the allocation of the resources rationally in accordance with the development needs of the country. This proper allocation not only results in the expansion of trade and industry in both public and private sectors but also promotes balanced economic growth in the country.

Provide Benefits to Investors:

There are many benefits that are enjoyed by the Investors as the credit market helps the investors, i.e., those who have funds to invest in long-term financial assets, in many ways. Capital market basically brings together the buyers and sellers of securities and thus ensures the marketability of investments. It also helps in enabling the Stock Exchange to keep track of their investments and channelize them into most profitable lines.

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