Capital market is a platform where the funds are raised i.e. debt and equity. Here, the people or institutions who want to save their money i.e. a part of their income will save their money by buying debt or equity and this money is invested into the most productive areas. A good financial system is important for an economy because it helps it to grow and develop. A capital market consists of developmental banks, financial institutions, merchant banks, commercial banks, stock exchanges etc.
In a capital market, the people who want to save can buy the shares or debentures from the company who is offering the same in exchange of money. This is done with the stock exchanges and brokers as middlemen. In an ideal capital market, the funds are available at a reasonable cost and market operations are free and fair. There should be transparency in operations so that it does not create any conflict later on.
The capital market has two divisions–
- Primary market
- Secondary market
Primary market is the new issues market. Here, the securities are issued for the first time. Funds are required by the businesses for various purposes such as setting up the enterprise, day to day activities, for expansion, growth, new project, diversification, modernisations, mergers or takeovers etc. The funds can be thus raised from various sources including the primary market. Here, the company will issue the securities of the company and then the people who want to save their money will buy these securities and the company will get the funds for their activities and then in return the company will have to pay the dividend on the shares or interest on debentures.
The company can raise the funds in the form of equity shares, preference shares, debentures, bonds, deposits and loans.
There are several methods for flotation of funds in the primary market. They are as under:
Offer through prospectus
Prospectus is the printed advertisement and a legal disclosure document that is circulated including the information about the offering made to the public. It contains information about the company, its management, consent of directors, bankers and auditors, and other important information which will help the investor to make an informed decision. It is issued before making the offering to the public and the company should be listed on the stock exchange. The contents of the prospectus are in accordance with the provisions of the companies act and also with the SEBI guidelines.
Offer for sale
In this method, the securities are not offered to the public directly. They are offered to the public through the intermediaries. These intermediaries include the stock brokers; issuing houses etc. the companies sell the securities to these intermediaries at an agreed price who in turn will resell these to the general public.
Private placement is good method to raise funds if the company wants to avoid the excess cost of raising funds which includes some mandatory expenses. In this case, the company will offer the securities to only some institutional investors and to some individual investors. This is also helpful to raise funds quickly without spending much time in formalities.
Rights issue means the right given to the existing shareholders to buy the new shares of the company in proportion of the available shares with them. The company thus saves significant amount to money in the form of underwriting fees, advertising cost etc.
Initial public offer means that the first time company is offering the securities in the market. The e-IPOs mean that the company will issue the securities for the first time and through electronic media. The SEBI registered brokers will have to be appointed, who will accept the orders from the public and place the order with the company. The company manager will coordinate the activity among the intermediaries in this offer.
Secondary market is the platform where the existing securities are dealt with. Here, the new investors can invest into the securities and the existing investors can disinvest or invest more, as they wish. It is very helpful in economic growth and development as it channelizes the funds to the most productive use through the activity of investment, reinvestment and disinvestment. Here the main role is played by the stock exchanges or stock markets. With the advanced technology, it has become easier to buy and sell the securities as per the comfort from anywhere at any time. National stock exchange, Bombay stock exchange are some examples of the same.
Secondary market is thus the place where the existing securities are bought as well as sold. It has a geographical location and thus a physical existence. In secondary markets there is not a fixed price for the securities but it fluctuates based on the demand and supply of the securities in the market. It is quick so that the investors can get the funds they invested quickly back in the form of cash.
Capital market is thus the place where the investors can invest into the securities offered by the companies i.e. the new securities or the existing ones. It encourages economic growth and therefore, it is very important for the countries to develop. Both money market and capital markets are the platforms where the savers save their money and the funds are put o the most productive areas but the main difference lies in the maturity period. The money market instruments are for the short period of time and the capital market instruments are for long period of time i.e. more than one year.