Every business needs to be capital to handle day-to-day various business functions. In this fund requirements, an organization has to be required both types of capital, such as short-term and long-term capital, according to their business model. For this short-term financial capital, companies take out a loan and issue promissory notes and such kinds of securities to fulfill their short-term financial needs. In the same as, to meet long-term financial requirements, companies obtain long-term funds by issuing shares, debentures, bonds, etc., in the capital market.
The capital market operates all kinds of fund management functionalities, and in this way, it has a large sense. To operates all different financial functions, it is divided into a different part, and it’s known as different types of capital market. Basically, we can say that capital markets are places where traders and buyers meet and trade their securities. Capital market, deals with trades of stocks, bonds, and other financial assets. In this article, we are addressing different types of capital markets. But before that, understand what capital markets are.
What are capital markets?
A capital market is such kind of marketplace which makes enables trade, buying, and selling of securities for business organizations and individuals. A capital market deals with such types of securities whose maturity age exceeds more than one year. In short, a capital market has involved with deals of long-term securities. In some cases, a government also involve in the capital market when they need to distributions of long-term bonds or securities.
A capital market has a broad sense; it can not be assumed in a typical way. That can be either physical or online or both marketplaces where long-term financial instruments are traded. For example, stock markets, currency markets, and bond markets are the best examples of capital markets.
How does the capital market work?
Basically, the capital markets operated functionalities of buying and selling long-term securities. In this way, capital markets play a crucial role in helping out to make the growth of the economy. It helps to raise funds for business organizations. In this way, organizations can easily enable their various business operation and expand new projects. Capital markets provide a secure platform in various ways where financial securities and long-term debt are traded. The Securities Exchange Board of India (SEBI) governs the capital market in India. Private and government bankers and investors are the best examples of capital markets.
Functions of capital market
The capital market operates different types of functions that are given below;
Creates a link between borrowers and investors
It is a crucial function that is operated by the financial market. It connects borrowers and investors on a platform and serves a role as an intermediately between them.
Makes a formation of capital
The formation of capital makes it easy via the capital market. It enables to provision of funds to organizations within a time when they have actual needs.
Controlling the securities prices
Capital markets play a crucial role to regulates securities prices in the market. It helps to prevent speculative activities and observe the accuracy of all functions. The capital market makes accurate the rate of interest which is charged to the borrowers, and in this way, it stabilizes the securities prices. As a result, it helps the overgrowth of the economy.
Provides great opportunities for investors
Through the capital market, investors can meet great investment opportunities. The capital market regulates and observe all function, and also they involve an intermediary role between investors and borrowers. In this way, the capital market reduces the risk for investors, and compared to putting their money in a bank saving account, they can meet great investment opportunities of their money. Investors can invest in different types of securities and obtain high-interest rates with minimum risks.
Reducing transaction costs and time
As we discussed above, the capital market is involved in the trade of long-term securities. All trading process operates through an automated program system that reduces the time and cost for traders and that enables them to make transaction settlement process within the time schedule.
Liquidity of cash flow
Through the capital markets, investors can easily buy and sell financial instruments that create cash flows in the economy. It also motivates promoters to produce more securities, and it helps borrowers to gain funds to fulfill their business operations. For investors side, it helps them to secure investments with minimum risk and higher interest rates. As a result, it creates more cash liquidities which are important to grow the economy.
Types of capital market
Capital markets can be categorized according to their different functions. The basic types of capital markets are given below;
The primary market is that place where the promoters issue fresh securities for the first time and sell them publicly. That market is also called as New Issues Market. In that market, business organizations or companies and government issues various types of financial security and debt and raise long-term funds. New IPO and Debentures are the best examples of that securities. The Initial Public Offer (IPO) is a process used by business organizations to make a first-time offer to investors.
The issuer company has to follow the rules and regulations which is provided by SEBI and needs to file reports with the Securities and Exchange Commission (SEC) and other securities agencies. After this approval by them, it is entitled to go public and can offer its securities.
Sometimes, it happens that small investors are not able to buy securities on the primary market, that was because the issuer company and its associate investment bankers have a short time to complete their required volume. That’s the reason they most probably concentrate on selling all available securities to large-scale investors, who are able to buy maximum securities at once.
A secondary market is a place where buyers and sellers trade old securities and debt on that market. It has slight differences from the primary market. Here the securities and debt traded in the market are already issued in the primary market and are traded there between investors and original issuers.
Investors can trade financial securities in the secondary capital market via a stock exchange. Like, the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), Etc. Overseen places are also included in secondary markets, such as New York Stock Exchange, NASDAQ, etc. In this way, we can say there is a basic difference between Primary Market and Secondary Market.
Capital markets are the most essential part of the Financial industry. It enables the gathering of investors and buyers, including the government and individuals. If we talk about the types of capital markets. The capital market is divided into two categories; Primary Market, and the Secondary Market. According to the functions of markets, the primary market is the place where fresh securities are issued and listed by the companies for the first time. While the secondary market that place where allows traders to trade those securities which are already issued in the primary market. The advantage of these markets is that they allow capital to move about from those who have actually had it to those who have actually needed it.