Madhavi Gaur
August 31, 2023 02:43
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Explore Capital Markets! UPSC aspirants, learn how capital markets channel funds for investments & economic development.
The capital market constitutes a division within the financial market where various long-term securities, including stocks, bonds, and other financial instruments, are traded. This platform serves as a means for businesses and governments to acquire capital while enabling investors to engage in trading these securities for potential returns. An essential function of the capital market is to facilitate the flow of funds from individuals who save to entities in need of financing, consequently supporting enduring investments in the economy.
Here are various types of Capital Markets and their corresponding examples presented in the table given below:
| Capital Market Type | Description | Examples |
|---|---|---|
| Commodities Market | Market for buying and selling commodities | Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX) |
| Debt Market | Market for buying and selling debt instruments | Government Bonds, Corporate Bonds, Debentures |
| Derivatives Market | Market for trading derivative contracts | Futures, Options, Swaps |
| Equity Market | Market for buying and selling shares of ownership in companies | National Stock Exchange (NSE), Bombay Stock Exchange (BSE) |
| Foreign Exchange Market | Market for buying and selling currencies | Interbank Foreign Exchange Market, Forex Exchange Market |
| Money Market | Market for short-term borrowing and lending | Treasury Bills, Commercial Paper, Certificates of Deposit |
| Mortgage Market | Market for buying and selling mortgage-backed securities | Secondary Mortgage Market, Mortgage-Backed Securities (MBS) |
| Primary Market | Market for issuing and buying newly issued securities | Initial Public Offerings (IPOs), Rights Issues, Private Placements |
| Secondary Market | Market for buying and selling existing securities | Stock Exchanges, Over-the-Counter (OTC) Markets |
These distinct categories of these markets offer opportunities for investors to engage in diverse financial instruments, trade securities, and access various sectors of the economy.
The capital market in India pertains to the sector of the financial market dealing with long-term securities like stocks and bonds. Below are insights into the structure and historical progression of the Indian capital market:
Primary Market: In India, the primary market entails the initial issuance of new securities to the public. This encompasses Initial Public Offerings (IPOs), rights issues, and private placements. Oversight of the primary market is carried out by the Securities and Exchange Board of India (SEBI).
Secondary Market: The secondary market is where already issued securities are traded among investors. It incorporates stock exchanges, notably the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), facilitating the trading of equity shares, bonds, and other securities. SEBI also oversees the operations of the secondary market.
Stock Exchanges: India’s major stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These exchanges offer electronic trading platforms for securities transactions, contributing to price determination, liquidity enhancement, and equitable and transparent trading practices.
Securities Depositories: The National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL) function as central securities depositories in India. They streamline the electronic holding and settlement of securities, obviating the need for physical certificates.
Regulatory Authorities: SEBI is the regulatory authority governing India’s market. It oversees the functioning of stock exchanges, brokers, investment banks, and intermediaries. SEBI formulates regulations, monitors market activities, and safeguards the interests of investors while ensuring market integrity.
Here are various instruments of the capital market in India, presented in a table below:
| Instrument | Description |
|---|---|
| Bonds | Fixed-income securities issued by governments and corporations, paying periodic interest and returning the principal. |
| Commercial Paper | Short-term unsecured promissory notes issued by corporations to meet short-term funding needs. |
| Debentures | Long-term debt instruments issued by companies, providing fixed interest payments and repayment of principal. |
| Derivatives | Financial contracts with values derived from underlying assets, used for hedging, speculation, and risk management. |
| Equity Shares | Represent ownership in a company; investors receive dividends and have voting rights. |
| Exchange-Traded Funds (ETFs) | Invest in a basket of securities and trade on stock exchanges like individual stocks. |
| Infrastructure Investment Trusts (InvITs) | Allow investment in infrastructure projects, providing regular income through distributions from project cash flows. |
| Mutual Funds | Pool funds from multiple investors to invest in a diversified portfolio of securities, managed by professional fund managers. |
| Preference Shares | Carry preferential rights over equity shares, such as fixed dividend payouts and priority in case of liquidation. |
| Real Estate Investment Trusts (REITs) | Enable investment in income-generating real estate assets, offering regular income and potential capital appreciation. |
| Treasury Bills | Short-term government securities issued to raise funds and manage the short-term liquidity needs of the government. |
These instruments offer a range of opportunities for individuals and institutions to invest, raise capital, manage risks, and engage in the Indian capital market.
The Indian capital market has undergone substantial evolution, with pivotal milestones including:
The functions performed by capital markets are diverse and contribute significantly to the effective allocation of capital and the advancement of economic growth. Here are the primary roles that capital markets fulfill:
Capital Mobilization: Capital markets serve as a platform where entities such as businesses, governments, and others can secure long-term capital by issuing securities like stocks and bonds. This avenue enables them to finance ventures, expand their endeavors, support projects, and foster economic progress.
Investment Opportunities: Within capital markets, a broad array of investment prospects is available to both individuals and institutions. Investors can partake in the capital market by acquiring securities and earning returns in the form of dividends, interest payments, and capital appreciation.
Liquidity Provision: Facilitating liquidity is another key role of capital markets, allowing investors to smoothly trade securities. The secondary market facilitates the transfer of securities, granting investors the ability to convert investments into cash when required.
Price Determination: The process of price discovery is facilitated by capital markets, where buyers and sellers interact to establish fair security prices. The equilibrium between supply and demand dictates these prices, reflecting perceived value and market sentiment.
Risk Management: Capital markets offer instruments like derivatives that enable investors to mitigate risks associated with market uncertainties, interest rate shifts, and price fluctuations. These risk management tools help in hedging and transferring risk exposure.
Efficient Capital Allocation: Efficient capital allocation is a pivotal function of capital markets. Investors direct funds toward enterprises and projects displaying strong growth potential, which enhances resource allocation and economic efficiency.
Wealth Generation and Distribution: Participation in wealth generation is made possible by capital markets for both individuals and institutions. Through investments in securities, the opportunity to accumulate wealth and earn returns is extended, thus contributing to wealth distribution and economic inclusivity.
Corporate Governance and Transparency: Listed companies in capital markets are mandated to adhere to transparency and accountability standards, which promotes good corporate governance. This requirement fosters transparency, accountability, and investor trust in the financial system.
In summary, the roles carried out by these markets, including mobilizing savings, supporting investment, managing risks, efficiently allocating capital, and promoting economic growth, are of utmost importance.
Understanding capital markets is crucial for the UPSC (Union Public Service Commission) examination, as it forms part of the syllabus for various exams, such as the Civil Services Examination (CSE). Aspirants often encounter this topic in UPSC Online Coaching and UPSC Mock Tests, which provide comprehensive preparation.
Gaining insight into markets, their instruments, and their impact on the economy is vital for candidates aiming to analyze economic policies, evaluate financial consequences, and comprehend the significance of the financial sector. This knowledge is relevant for UPSC exams that assess candidates’ understanding of national and international issues.
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