Capital Market – Definition, Features, Types & Functions

What is Capital Market?

The financial market which deals with long-term equity and debt to buy and sell for more than one year is known as Capital Market. Capital market is a place which deals with both medium and long-term financial instruments.

It supplies medium and long-term borrowing working capital from industries to central, state and local Govt. Capital market also deals in the ordinary stock or shares & debenture of corporation and bonds securities of Govt.

Read- Structure Of Money Market In India

Features Of Capital Market

For the sake of clarification some of the most important features capital market are highlighted below:

1.Capital market deals with medium and long term securities which are traded.

2.Capital market offers higher return on investment of its investor.

3.It is the financial market which is not highly liquid in nature.

4.Capital market participants are both individuals and institutions.

5.It increases saving money with high return with investment.

6.It operates with the presence of intermediaries like brokers, underwriters, merchant bankers and collection banks.

7.Capital market operates or regulated by the Government rule and regulation.

8.Capital market is further divided into 2 categories Primary & secondary capital market.

9.Capital market raised funds for both long term & short term investment.

10.Capital markets provide liquidity to its investors.

11.The main instruments of capital market are share, stock, bonds and debentures.

Types Of Capital Market

The Capital Market is further divided into two categories:

i.Primary Market

ii.Secondary Market

What Is Primary Market?

Primary market of the capital market is the market for fresh shares & securities. Primary market is otherwise known as New issue market. This is the market where companies issue new securities from buyers & investors in exchange for cash. It deals with trade of new issues of stocks and securities sold to the buyers or investors.

Importance Of Primary Market

Initial Public Offering (IPO)

Follow on Public Offering (FPO)

Right Issue

Issue of Preference Share

Private Placement

Issue Of Debentures

New Fund Offer

Working Of Primary Market

What is the Secondary Market?

Secondary market of the capital market is the market for previously issued shares & securities. In the secondary market intermediaries are involved between investors.

In other words the part of the capital market where transactions of securities, shares & stocks take place is known as Secondary Market.

Importance Tools Of Secondary Market

Some of the most important Tools and instruments of secondary market are pointed below:

Equity Share


Mutual Funds



Working Of Secondary Market

Functions Of Capital Market

Some of the most important functions of capital market are discussed below:

Mobilisation of Savings

Capital market is an important source for mobilising ideal savings from the economy. If it mobilises funds from people for further investment in the productive channel of an economy, In that case it activates the monetary resources and puts them into proper investment.

Provides Service Provision

For important financial setup the capital market provides various types of services. It includes both long term and medium term loans for industries, business enterprises and companies.

Capital market provides other important services like underwriting service, consultancy services and finance export etc. These services are held in the manufacturing sector in a large spectrum.

Continuous availability of funds

It is another important function of the capital market where the investment revenue is continuously available for long term investment. This is a continuous basis for both buyer & seller and they can easily buy & sell securities as they are continuously available.

Basically capital market transactions are related to the stock exchange thus market ability in the capital market is easy.

It helps in economic growth & development

Capital Market enhances the production and production in the national economy as it provides funds for long term the financial requirement of a business houses is made by the capital market. This helps in increasing production and productivity in the economy by generating new employment opportunities.

It helps in capital formation

Capital market helps in capital formation. Capital market is to add the existing stock of capital in the economy through mobilisation of ideal resources. It generates savings, mobilisation is made available to various sources for agricultural capital formation.

Proper allocation of funds

Capital market not only helps to mobilise funds but also helps in proper allocation of funds. Capital market has proper regulation over the resources so that it can direct invest funds in a quantitative manner.

Provision of long investment avenue

Capital market raises resources for a long time. Thus it provides an investment avenue for people who want to invest resources for a long period of time. It provides suitable interest return to all investor instruments such as bond, equity shares, mutual fund and insurance policy etc provide investment avenue for the public.

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