Capital Market is the market from where individuals, companies and govt. can long term financing by engaging in buying and selling of securities. Capital Market comprises of Primary Market and Secondary Market. In primary market, newly issued stocks and bonds are exchanged and in the secondary market trade of existing stocks and bonds take place.
Capital Market can be divided into Bond Market and Stock Market. In Bond Market, buying and selling of newly issued and existing bonds takes place. In Stock Market, exchange of newly issued and existing shares or stocks is carried out.
The participants of capital market are mainly those who have a surplus of funds and those who have a deficit of funds. The persons having surplus money want to invest in capital market in hope of getting high returns on their investment. On the other hand, people with fund deficit try to get financing from the capital market by selling stocks and bonds. These two kinds of activities keep the capital market going.
Capital Market is characterized as the provider of long-term financing. The instruments used for this long-term financing are equity instruments, insurance instruments, derivative instruments and especially bonds.
Initial Public Offering
Companies can raise large amount of long term capital from capital market by issuing Initial Public Offering or IPO. A company gets “floated” in the stock market through an IPO. Whenever a company get financing through IPO, it has to lose some control over the company, proportional to the amount of shares that is sold to the investors. But the company interested in issuing IPO has to satisfy the entry standards to get a full listing in the stock market. Earlier these entry standards were quite stringent, but nowadays initiatives are taken by the stock markets to make the entry a bit easy for the new, technology based innovative companies. New stock markets are also created with simplified entry requirement for new innovative companies. These new stock markets have all the characteristics of a public stock market and these provide the new companies their much required access to capital.
Venture Capital in the Capital Market
Venture capital is the fund that is raised through capital market by specialized agents. This Venture Capital is one of the main sources of funding for the new business companies. Venture capitalists buy bonds and shares issued by a new company. They are not interested in getting immediate dividends from the company in which they have invested. They want the companies to expand their scale which will in turn increase the value of their invested capital. So, the Venture Capitalists are generally interested in promoting new companies with high growth prospect.
Capital Market is now becoming more global and the competition among the institutions are rising in this era of “institutionalized” markets. A larger share of credit now flows through the channels of capital market. Financing through capital market involves a much easier process compared to financing through banks. Deregulation, growing competition, advanced technology and fluctuating interest rates has resulted in increased efficiency of capital markets. Capital Markets now has to offer more flexible ranges of financial instruments for borrowing and raising funds which help the borrowers and investors to manage risks associated with lending and investment, in a better way.