Capital market is the market for long term funds, just as the money market is the market for short term funds. It refers to all the facilities and the institutional arrangements for borrowing and lending term funds (medium-term and long-term funds).it does not deal in capital goods but is concerned with the raising of money capital for purposes of investment.
The demand for long-term memory capital comes predominantly from private sector manufacturing industries and agriculture and from the government largely for the purpose of economic development. As the central and state governments are investing not only on economic overheads like transport, irrigation and power development but also on basic industries and sometimes even in consumer goods industries, they require substantial sums from the capital market.
The supply of funds for the capital market comes largely from individual savers, corporate savings, banks, insurance companies specialized financing agencies and the government. Among the institutions, we may refer to the following:
- Commercial banks are important investors, but are largely interested in govt. securities and, to a small extent, debentures of companies;
- LIC and GIC are of growing importance in the Indian capital market, though their major interest is in government securities;
- Provident funds constitute a major medium of savings but their investment too are mostly in govt. securities; and
- Special institutions set up since independence , viz, IFCI, ICICI, IDBI, UTI, etc. –generally called development financial institutions (DFIs) –aim at supplying long term capital to the private sector.
- There are financial intermediaries in the capital market, such as merchant bankers, mutual funds leasing companies etc. which help in mobilizing savings and supplying funds to investors.
Like all markets, the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders).an ideal capital attempts to provide adequate capital at reasonable rate of return for any business which offers a prospective yield high enough to make borrowing worthwhile.
The capital market is broadly divided into two the gilt-edged market and the industrial securities market. The gilt-edged market refers to the market for government and semi govt. securities, backed by the RBI. The securities traded in this market are stable in value and are much sought after by banks and other institutions.
The industrial securities market refers to the market for shares and debentures of old and new companies. This market is further divided into the new issue market and old capital market meaning the stock exchange.
The new issue market –often referred to as primary market- refers to raising of new capital in the form of shares and debentures whereas the old issue market –commonly known as stock exchange or stock market-deals with securities already issued by the companies. It is also known as the secondary market. Both markets are equally important, but often the issue market IS MUCH MORE IMPORTANT from the point of view of economic growth.
DFIs supply funds for investment: financial intermediaries like merchant bankers help the corporate sector to raise funds in the capital market.