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Capital market are the means by which large amounts of money (capital) are raised by companies, governments and other organizations for long term use and the subsequent trade of the instruments issued in recognition of such capital.


There are two types of capital markets:

(1) Money Market.

(2) Capital Market.

(1) Money Market:

Definition and Examples:

Money market is the market for very short term loans. It mainly centers round its activities on the discount houses and the commercial banks. The money market, deals in various credit instruments, for example, the bill of exchange, short dated bonds, certificate of deposits, the treasury bills, etc.

(2) Capital Market:

Definition and Example:

Capital market refers to a market where the financial institutions mobilize the savings of the people and lend them for long term period for raising new capital in the country. Capital market, in other words, refers to the long term borrowing and lending of capital funds institutions.

Instruments of Capital Market:

The principal capital market instruments used for long term funds are:

(i) Mortgages.

(ii) Corporation bonds.

(iii) State and local government bonds.

(iv) Federally sponsored credit agency securities.

(v) Finance company bonds.

(vi) Commercial bank bonds and commercial paper.

(viii) Corporate stock.

Institutional Sources of Capital Market:

There are number of financial institutions which are directly involved with real investment in the economy. These institutions mobilize the saving from the people and channel funds for financing the development expenditure of the industry and government of a country.

The financial institutions take maximum care in investing funds in those projects where there is high degree of security and the income is certain. The main institutional sources of capital market are as follows:

(i) Insurance Companies. Insurance companies are financial intermediaries. They call money by providing protection from certain risks to individuals and firms. The insurance companies invest the funds in long term investments, primarily mortgage loans and corporate bonds.

(ii) Pension Funds. The pension funds are provided by both employees and employers. These funds are now increasing utilized in the provision of long term loans for the industry and government.

(iii) Building Societies. The building societies are now activity engaged in providing funds for the construction, purchase of buildings for the industry and houses for the people.

(iv) Investment Trusts. The investment trust mobilize saving and meet the growing needs of corporate sector. The income of the investment trust depends upon the dividend it receives from shares invested in various companies.

(v) Unit Trust. The unit trust collects the small savings of the people by selling units of the trust. The holders of units can resell the units at the prevailing market value to the trust itself.

(vi) Saving Banks. The saving banks collect the savings from the people. The accumulated savings are invested in mortgage loans, corporate bonds, etc.

(vii) Specialized Finance Corporation. The specialized finance corporations are being established to help and provide finance to the private industrial sector in the form of medium and long term loans or foreign currencies.

(viii) Commercial Banks. The commercial banks are also now activity engaged in the provision of medium and long terms loans to the industrialists, agriculturists, specialist finance institutions, etc.

(ix) Stock Exchange. The stock exchange is a market in existing securities (shares, debentures and securities issued by the public authorities). The stock exchange provides a place for those persons who wish to sell the shares and also wish to buy them. Stock exchange, thus helps in raising equity capital for the industry