Capital Market: Functions, Instruments and Types

Preface

We all need money to function, there is no denying to this. None of our necessities can be fulfilled without money. The same goes for businesses or companies. They need money to carry out the expansion of their business and make further profits. Businesses or companies get this money from the capital market. The capital market is also known as the securities market. 

The capital market is the place where equity and debt-based securities can be sold or bought. Both equity and debt-based investors pool money in this market. To understand simply, capital is what businesses and entrepreneurs need to run their companies and the capital market is what provides it. 

Both investors and companies benefit from the market’s smooth functioning. Companies get the capital to work. Whereas, investors get the interest on their money or get the share of profits in the company they choose to invest in. Hence, the stronger the market of India is, the more opportunities India will have for growing businesses.

What is a “Capital Market”?

The capital market is the place where both long-term and short-term securities can be sold. It can be sold in both forms, equity and debt. When people have enough money to channel it into different uses, they put their money into the securities market. With the help of this market, investors can put their money into businesses they find promising in terms of profits. 

The capital market of India is regulated by the Securities and Exchange Board of India (SEBI). It protects the investors against any fraud and malpractices in the market and ensures fair play in the securities market. 

The securities is of different types. All of its types serve a different purpose that fulfills the needs of both investors and the company. The stock market, currency, bond market, etc. are the types of security markets in India. This is because different types of securities are traded here. The functions of capital market is to facilitate the exchange of equity shares, debentures, preference shares, and zero-coupon bonds. 

There are several functions of capital market, one of the function is to significantly contribute to strengthening the economy of the country and making sure the businesses easily get the funds. 

When businesses are able to raise funds and are able to invest that money in the betterment of the country, the economy automatically flourishes. Hence, the core role of the securities market is to strengthen the economy of the country.

What are the Functions of capital market?

The securities market of India makes sure that companies get the deserving funds and investors get the right channel to invest their money. Investors can invest their money via various approaches in the securities market. Similarly, companies can also get funding in different ways. But, in all ways, the securities market serves some common purposes for investors, companies, and the country, They are:

1. Linking Buyers And Sellers:

Linking buyers and sellers is one of the major functions of capital market. The market links investors who want to put their money to use and the people or companies who want funds.

It is an ideal way in which people make their money work for them. Investing money in promising stocks, bonds or companies helps them multiply it.

2. Raising Money:

The core purpose of the securities market is to raise money or funding. Companies register themselves in the market to raise funds from the public or investors. In exchange, investors get a share of the company. These shares are based on the amount invested. If a company requires funds through equity it can issue shares on the stock exchange. Some popular stock exchanges include BSE (Bombay Stock Exchange) and NSE(National Stock Exchange).

3. Regulates Security Price:

Securities in the securities are traded at a certain price. These prices are decided by the market itself. There are certain rules that companies need to abide by for fair play in the market in terms of security pricing. 

If investors or people are actively investing in the security, its price witnesses positive growth. Vice-versa happens in the case of declining interest of investors or people. Here, it can also be said that the price of security in the securities market is regulated by demand and supply forces. 

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4. Enables Investing:

The securities gives several options for investment to investors. One can invest in stocks, bonds, debt instruments, etc. With the growing technology, buying and selling securities have become easier than ever. Now it is easy to learn investing and do the actual investing from home or from anywhere in the world. This shows how far the Indian capital market has come.

5. Risk Management:

Investing can be risky if not done in the right way. This is why people who say they lost their money in the stock market are the ones who didn’t do it the right way. The capital market provides different options to investors for safeguarding their money or capital. The invested amount can be safeguarded with the help of diversification, hedge funds, etc. They help in minimizing the losses to an extent in times of market uncertainties and fluctuating interest rates.

6. Wealth Building:

Another significant functions of capital market is to pool money. The market enables investors to use their excess money to build greater wealth. On the other hand, companies use the invested money to expand and grow their businesses. Also, the securities market works majorly in the favour of the investors. It allows investors to invest money according to their needs. Options invested in both equities and debt are given.

Capital Market Instruments

The capital market is a vast place, the stock market, money market, bond market, and currency market are its parts. Various securities can be exchanged in the securities market. These securities can be referred to as stock market instruments, some of these are: 

1. Equity Shares: They provide ownership of the company to the investor along with voting rights and dividends. The ownership is based on the percentage of shares bought. 
   
2. Bonds: These are systematic investment options offered by governments and corporations. Investors get a set interest on their money periodically and a full amount at the time of maturity. 
   
3. Commercial Papers: It is a promissory note issued by the company in exchange for funds. It generally has a maturity of more than 270 days. 
   
4. Treasury Bills: Short-term securities issued by the government to settle short-term liabilities or liquidity needs. 
   
5. Exchange-Traded Funds: These securities are bought together just like a basket of stocks like bonds or funds. But, further, these stocks can be traded individually on stock exchanges. 
   
6. Preference Shares: These are the type of equity shares, but preference shareholders get the fixed payment in the form of dividends. This is given irrespective of profits made by the company. Also, in case of liquidation, preference share owners receive their invested amount first. 
   
7. Derivatives: Derivatives are underlying assets that are traded to safeguard the investment amount in the respective security or the stock.

Conclusion

The capital market is critical to modern economies because it facilitates the flow of funds and promotes growth. The functions of capital market are critical for businesses, investors, and the wider financial system.

The securities market significantly helps in economic growth by maintaining stability, encouraging investment, and facilitating effective resource allocation. Understanding the significance of the market and its numerous roles becomes more important for informed decision-making and sustainable growth as we navigate an ever-changing financial landscape.

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