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What is Capital Market?

A capital Market is a planned market where both business organizations and individuals exchange and sell equity securities and debt. A capital market is expected to be for the distribution and exchanging of long-term securities. Here, long-term investment means its lock-in period is more than a year.

Sometimes, the government also engage in the capital market, particularly by the distribution of long-term bond. As the government is not allowed to issue shares and equity securities.

Functions of Capital Market

  • Change of savings to finance long term investments
  • Minimizing information cost and transaction
  • Motivate proprietor of productive assets
  • Provide insurance upon price and market risk, through secondary trading
  • Expedite trading of securities
  • Speedy evaluation of financial measures like debentures and shares
  • Settlement of transaction on a particular given time or schedule

Types of Capital Market

The capital market is divided into two parts:

  • Primary Market: Also known as New Issue Market, it is the first time market trading of new securities and later available for institutions and individuals. It supports both private and public offerings. An organization provides securities to the public to accumulate funds and satisfy its long-term goals. In the primary market, the securities are issued by either an Initial Public Offer (IPO) or a Further Public Offer (FPO). IPO is a process through which an organization can make a public offer to the investors for the first time to invest. This trade is between the investors and the original issuer in the primary market.
  • Secondary Market: It is called secondary because the securities they have are old and already have been issued in the primary market for trade. This trade is between the investors and the original issuer in the primary market. The trade is between the buyer and seller and the stock exchange facility.

Other Capital Markets

Capital markets feature trading of other securities as well, including:

  • Foreign exchange.
  • Commodities.
  • Derivatives.