CAPITAL MARKET — MEANING, TYPES AND FUNCTIONS

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The capital market is the market where medium and long-term instruments are bought and sold. 

It is a market where medium and long-term debt or equity-based instruments are traded.

This is in contrast to the money market, where short-term financial instruments are bought and sold

Alternatively, the capital market can also refer to the groups of financial institutions established to grant long-term loans. 

Governments and large companies can obtain long-term finance from the capital market. As you will see in the next heading, the capital market is made up of primary and secondary markets.

Sections Of The Capital Markets

The capital markets can be divided into two sections: The primary market, where new shares are issued, and the secondary market, where existing securities are traded.

Primary market

Companies, governments, and public sector organizations can raise funds by selling new stock or issuing bonds in the primary market. 

The primary market is the part of the capital market that deals with the issuances and sales of new securities.

Investors buy new securities that have never been traded before in the primary markets. The process of selling new securities to investors is called underwriting.

Because the primary market is a market for new issues, it is sometimes called the new issues market.

There are four methods of issuing securities in the primary market, namely: Offer for sale, Right issue, private placing, and offer through a prospectus.

Secondary market

As its name seems to suggest, a secondary market is a market for trading second-hand securities.

Stated differently, It is a market for trading existing securities. It is the part of the capital market where previously issued securities are bought and sold.

Securities are sold and transferred from one investor to another or from one speculator to another in the secondary market.

Functions Of Capital Market

1. Financial intermediation: The capital market serves as a financial intermediator by channeling funds from the surplus units of a country to the deficient units of a country.

2. Encourage saving habits: The capital market provides facilities for investors to save more. Such investors would have wasted their money on unproductive assets like vehicles if the capital market had not existed.

3. Provide funds: As money is continuously invested in the capital market, It provides businesses and governments with means of obtaining long-term finance that would otherwise have not been possible.

4. Assists in capital formation: Capital formation refers to a rise in a country's capital stock.

To make additional capital, savings and investments are essential and the capital market provides a mechanism for achieving these goals.

People who don't need their money right now can invest in the capital market.

Rather than allowing cash to sit idle, the capital market allows this money to be invested, as well as providing enterprises with the ability to borrow and purchase capital goods.

For example, When James buys Apple stocks, Apple receives additional funds that can be used to purchase more capital items such as equipment, machinery, and buildings, thus expanding capital stocks.

5. Provision of investment avenue: Prospective investors and existing investors can invest in the capital market. 

The capital market provides a means of Long term investing. Almost anyone can invest in the capital market as long as they meet the minimum legal requirement.

6. Economic growth and development: A simple definition of economic growth is "an increase in real GDP over time".

Given that GDP is made up of consumption, investment, Net export, and government spending. 

Given also that the capital market offers funds for businesses to purchase capital goods (investments) and the government with a source of funding (government spending), it's only logical that the capital market contributes to economic growth.

The capital market also aids economic development by providing the government with the required funds to carry out large-scale infrastructure and development projects.

7. Alternative source of funding: The capital market also provides the government with an alternate source of funding besides tax.

Government can easily obtain funds from the capital market without having to overburden taxpayers.

BOTTOM LINE

A well-developed capital market is essential for economic growth and development because it provides a mechanism for saving and investments.

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