CAPITAL MARKET

Concept:
It refers to the market for long term and medium term funds, it includes all
facilities and institutional arrangements for borrowing and lending term
funds. The demand for long term funds comes mainly from the private
sector, manufacturing industries, agriculture and government largely for the
purpose of economic development. The Central and State government
invests not only for economic development such as transport, irrigation,
power supply but also basic and consumer goods industries in districts and
require huge sums of funds from the capital market. The supply of funds
comes largely from individuals, corporates, banks, insurance companies,
financial institutions and government. The participants in the capital market
are financial institutions, Commercial banks, Primary and secondary
markets.
Role of Capital Market:
1. Capital Formation:
The capital market mobilizes savings of households and of industrial
concerns, these savings are mobilized by way of fixed deposits,
mutual funds, shares, bonds, debentures etc. Such savings are invested
for productive purposes. Thus, savings and investments lead to capital
formation in the country.
2. Economic Growth:
It facilitates the growth of industrial sector as well as growth of other
allied sectors in the economy. It makes it possible to lend funds for
various purposes both in the public and the private sector. Productive
use of capital funds leads to economic growth and development.
3. Development of Backward Areas:
It provides funds for projects in the backward areas.
For example: The entrepreneur can obtain funds by way of long term
loan, debentures, shares, bonds etc. for investment in the backward
areas.
The government raises funds for development of rural areas by the
issue of Rural Development bonds from the capital market.

4. Employment Opportunities:
a) Direct employment: The capital market and its related activities
such as the stock market, banks, broking firms and other
financial institutions provide direct employment.
b) Indirect employment: Indirect employment is generated in all
other sectors due to the funds provided for development
projects.
5. Foreign Capital:
The capital market makes it possible to generate foreign capital by
way of foreign currency convertible bonds, American depository
receipts, Global depository receipts and other securities, such foreign
capital raised is vital for economic development of the nation. It not
only brings in foreign capital but also technology which is essential
for the progress of the nation.
5. Development of Stock Market:
It facilitates the development of stock market as a number of
individual investors, companies, banks and other financial institutions
invest in the securities in the primary market which are traded in the
secondary market stock exchanges. Reforms and active participation
of these segments has lead to the rapid growth and development of the
stock market.
6. Revival of sick units:
The commercial and financial institutions provide timely assistance to
sick units. To overcome the industrial sickness the banks and financial
institutions may write off a part of their loan or they reschedule the
loan so as to offer payment flexibility to weak units which helps them
to overcome their financial industrial sickness.
7. Easy Liquidity:
The secondary market makes it possible for the investor to sell off
their shareholdings in the form of shares and debentures and convert
them to liquid cash.

8. Investment Opportunities:
Capital Market provides excellent investment opportunities in the
form of shares, bonds, debentures, fixed deposits, government
securities etc in order to earn good returns from these investments.