Capital Market:
Definition:
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.
Types:
There are
two types of financing/capital markets:
(1) Money Market.
(2) Capital
Market.
(1)
Money Market:
Money
market is the market for very short term loans. It mainly
centers round its activities on the discount houses, the
commercial banks. The money market, deals in various credit
instruments such as, the bill of exchange, short dated bonds,
certificate of deposits, the treasury bills, etc.
(2)
Capital Market:
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 country. Capital Market, in
other words, refers to the long term borrowing and lending of
capital funds.
Capital Market Instruments:
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 banks bonds
and commercial paper.
(viii) Corporate stock.
Institutional sources of Capital Market:
There are a 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, need 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 of the
people. The accumulated saving is invested in mortgage loans,
corporate bonds.
(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., 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
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