Know about the Features and Importance of Capital Markets

The capital market is a market dealing with long-term loans. Its function is to supply industry with working and fixed capital. It finances long-term and medium-term borrowings of the local, state, and central governments. The capital market is concerned with ordinary stocks like debentures and shares of corporations and securities and bonds of the government.

The funds flowing into the capital market emerge from persons, who have savings to invest, commercial banks, merchant banks as well as non-banking financial intermediaries like unit trusts, finance houses, insurance companies, building societies, venture capital firms, mutual funds, leasing finance, etc.Capital market consulting helps to source capital funds.

In addition, there are issuing houses that do not provide capital but underwrite debentures and shares of companies and aid in the selling of new debentures and shares. The demand for funds emerges from joint stock companies for fixed and working capital inventories and assets and from central, state and local governments, port trusts, improvement, trusts etc. to finance different assets and expenditures. Capital management services direct such funds.

Features

• Capital markets are huge markets, and hence, companies needing huge capital will raise capital through such markets. This is in contrast to the situation where companies need small capital and will approach banks and other financial institutions instead of the capital market.

• In the capital market, funds are raised for the long-term and not for short-term. The companies raise funds through a bond issue or equity issue for long periods of time ranging from 5 years to 25 years.

• Capital markets are highly regulated since these markets serve as the backbone of the economy, and these markets help in capital formation. Any problem in these markets can cause severe issues to emerge in the financial and economic conditions of the country.Private capital management is crucial for the economy.

• Liquidity is another feature of capital markets. Such markets are very liquid thanks to the presence of many stakeholders like mutual funds, banks, hedge funds, and so on. Therefore, investors seeking to exit from their investments can do this anytime as opposed to other types of the market like gold, real estate, etc., which are ill-liquid. In this case, investors cannot sell their assets easily when they desire and may have to sell at a discount due to lack of liquidity.

• The capital market features a variety of instrument and offers much flexibility. Investors can invest in equity, debentures, bonds, futures, and many more. This is based on their capacity to take risks and future plans. Companies can raise funds through equity route if they high leverage and via debenture or bond issue if they are less leveraged. These take place in private capital markets.
Importance
• The capital market is composed of a complex of mechanisms and institutions through which long-term and medium-term funds are pooled and made available to governments, businesses, and individuals. It also covers the process by which already outstanding securities are transferred.

• The capital market plays a crucial role in mobilizing savings and channelizing them into productive investments for developing industry and commerce. Thus, the capital market helps in capital formation and resultant economic growth of the country.

• The capital market is a link between investors and savers. Investors are borrowers of funds while savers are lenders of funds.
These are all some crucial facts about the capital market.