Business Studies Part I
Business Studies Part II

Capital Market

The term capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It consists of a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general. It directs these savings into their most productive use leading to growth and development of the economy. The capital market consists of development banks, commercial banks, and stock exchanges.

An ideal capital market is one where finance is available at a reasonable cost. The process of economic development is facilitated by the existence of a well functioning capital market. In fact, the development of the financial system is seen as a necessary condition for economic growth. It is essential that financial institutions are sufficiently developed and that market operations are free, fair, competitive and transparent. The capital market should also be efficient in respect of the information that it delivers, minimize transaction costs and allocate capital most productively.

Differences between Capital Market and Money Market:

S.No.

Basis

Capital Market

Money Market

1.

Duration

It is a market for long term funds.

It is a market for short term funds whose maturity period is up to one year.

2.

Participants

The main participants in the capital market are banks, financial institutions, corporate bodies, foreign investors and retail investors.

The main participants are institutional investors.

3.

Investment Outlay

Since the cost of securities may be low, the investment can be made in the capital market can be with less capital.

Since the cost of securities may be high, investment in the money market requires huge capital outlay.

4.

Liquidity

The securities in the capital market enjoy good liquidity.

The securities in the money market enjoy high liquidity as The Discount Finance House of India works as a compulsory market maker.

5.

Risk and return

The instruments in the capital market carry high risk as the expected return is high on them.

The instruments in the money market carry low risk as the expected return is low on them.

  1. Bridge financing is the other name used for the funds required to meet floatation costs.
  2. Commercial Papers issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par. Its maturity period may range from a fortnight to a year. It is also used to meet the short term seasonal and working capital requirements of a business enterprise. For example it is used for the purpose of bridge financing.
  3. Capital Market and Money Market.

Differences between Primary Market and Secondary Market:

S. No.

Basis

Capital Market

Money Market

1.

Duration

It is a market for long term funds.

It is a market for short term funds whose maturity period is up to one year.

2.

Participants

The main participants in capital market are banks, financial institutions, corporate bodies, foreign investors and retail investors.

The main participants are institutional investors.

3.

Investment Outlay

Since, the cost of securities may be low, investment can be made in the capital market can be with less capital.

Since the cost of securities may be high, investment in the money market requires huge capital outlay.

4.

Liquidity

The securities in capital market enjoy good liquidity.

The securities in money market enjoy high liquidity as The Discount Finance House of India works as a compulsory market maker.

5.

Risk and return

The instruments in capital market carry high risk as the expected return is high on them.

The instruments in money market carry low risk as the expected return is low on them.