Chapter 9 MONEY MARKET AND CAPITAL MARKET IN INDIA
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The capital market is a fundamental aspect of the economy, serving as a platform for the buying and selling of financial securities such as stocks, bonds, and other long-term investments. It's a vital component of a country's financial system, enabling businesses and governments to raise funds for various projects and investments.
Here's a breakdown of key components and functions of the capital market:
Primary Market: This is where new securities are issued and sold for the first time. It's where companies raise capital by issuing stocks or bonds to investors directly. In this market, the issuing entity receives funds directly from investors, and these transactions have the potential to increase the capital available for investment in the economy.
Secondary Market: Once securities are issued in the primary market, they can be traded on the secondary market. This is where investors buy and sell previously issued securities among themselves. The secondary market provides liquidity to investors, allowing them to easily convert their investments into cash. Stock exchanges such as the New York Stock Exchange (NYSE) and NASDAQ are examples of secondary markets.
Equity Market: Also known as the stock market, this segment of the capital market deals with the buying and selling of stocks (equity securities) issued by companies. Investors purchase shares of ownership in these companies, which entitles them to a portion of the company's profits through dividends and potential capital gains.
Debt Market: In this segment, fixed-income securities such as bonds are traded. Governments, corporations, and other entities issue bonds to raise funds. Investors who buy bonds are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity.
Derivatives Market: Derivatives are financial instruments whose value is derived from the value of an underlying asset, index, or interest rate. This market includes instruments like options and futures contracts, which investors use for hedging, speculation, and arbitrage.
Regulation and Oversight: Capital markets are typically regulated to ensure fair and transparent trading practices, protect investors, and maintain the stability of the financial system. Regulatory bodies such as the Securities and Exchange Commission (SEC) in the United States play a crucial role in overseeing capital markets.
Overall, the capital market plays a crucial role in allocating financial resources efficiently, facilitating economic growth, and enabling businesses and governments to fund their operations and investments. It provides opportunities for investors to earn returns on their investments while also bearing risks associated with fluctuations in asset prices and market conditions.