If you are a stock market beginner, you may have heard of the term ‘capital market’. It is a comprehensive system that brings financial buyers and sellers together. You must have a fundamental knowledge of capital markets if you want to be an active investor and participant in the stock market. 

Here is all you need to know about capital markets in the simplest manner.

 

Basic Concept of Capital Market

A capital market is a platform or a marketplace where investors and buyers trade in long-term financial securities. The capital market in India is regulated by the Securities and Exchange Board of India (SEBI).

Investors, also known as suppliers or lenders, are people who want to invest their money or loan their capital. Individuals and banks are usually classified as investors.

Buyers, also known as borrowers, are people who need money or capital for some purpose.  Companies, financial institutions, and governments are usually classified as buyers.

 

Types of Securities in Capital Market

Securities which have a lock-in or maturity period of more than one year are traded in the capital market. These securities are

  • Equity (stocks)
  • Debt instruments
  • Derivatives
  • Preference shares
  • Mutual funds
  • Exchange Traded Funds (ETFs)

 

Purpose of Capital Market

The capital market serves the following purposes:

  • Mobilise the funds from investors to buyers who need capital for equity, debt capital, working capital or trading capital for their business purposes.
  • Enable investors to earn money (interest, profit, dividend, or capital gain) on their surplus or idle savings.
  • Give a regulated market for investors to trade in securities at standard prices.
  • Reduce speculative activities.
  • Build capital liquidity in the country’s financial system.
  • Boost economic growth through effective utilization of resources.

 

Types of Capital Market

There are two types of capital markets:

 

  • Primary Market

In the primary market, companies, financial institutions or governments raise capital from the general public by issuing new stocks or bonds through an Initial Public Offering (IPO). They can also issue the right issues and private placement shares. A primary market allows the investors to purchase securities directly from the issuing entity.

  • Secondary Market

In the secondary market, trading of securities takes place. The secondary market is basically the stock exchange where you can buy or sell securities. Examples of secondary markets in India are National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 

 

Primary Market Secondary Market
Investors buy new shares or securities. They cannot sell.  Existing shareholders can both buy and sell their shares.
The purpose is capital formation. The purpose is to bring liquidity to the market.

 

If you are a novice investor, it may take time and patience to get hold of an understanding of the capital market. You may not be able to invest your money or take the right and timely decision till you are well informed and confident. 

 

Hence, it is advisable to seek professional equity investment and stock advisory consultation from Purnartha. A reputed name in portfolio management services and equity investment advisory, Purnartha has been responsible for the wealth creation of investors for more than a decade. It has a strong and experienced equity research and analytics team to meet your financial goals.