Question

Explain any two functions of Capital Market.

State functions of Capital Market.

Answer 1

1. Promotion of Thrift: A capital market inspires people to save money. It offers incentives for saving money in the form of attractive rates of interest and dividends. It also provides scope for appreciation in the capital value of investments.
2. Investment Avenue: A capital market provides profitable avenues to investors. It helps investors in earning maximum available return on their funds.
3. Liquidity: Securities used in a capital market are negotiable. The investors can sell them at any time. They can convert their securities into cash as and when necessary.
4. Availability of Capital: A capital market enables borrowers to obtain needed funds at a reasonable cost. It keeps the wheels of industry and commerce moving by providing funds easily and quickly. It also enables the government to raise funds through bonds and other types of securities.
5. Ready Market: Borrowers get a ready market for their shares, debentures, bonds and other instruments in a capital market. They can sell these securities directly to investors. Capital market serves as a link between those who save money and who need money.
6. Transfer of Funds: A capital market provides a mechanism for transfer of claims on capital funds.
7. Balance between Demand and Supply: A capital market brings about a balance between demand and supply of capital. It maintains cost of capital at reasonable levels.
8. Stability: Capital markets consist of financial intermediaries. These experts can promote stability in the values of securities which represent capital funds.
9. Capital Formation: Capital markets facilitate the movement of public savings into most productive channels. It helps to divert funds to those who can use them most profitably. Such movement of funds leads to capital formation and economic growth of the country. A well-developed capital market brings about rational allocation of funds and thereby helps to avoid wastage of the country's financial resources.

Answer 2

A capital market performs the following functions:

1. It promotes thrift and savings in the society.
2. It provides an avenue for investment of household savings.
3. It gives liquidity to investment in securities.
4. It helps business raise capital.
5. It provides a leading market for buying and selling securities.
6. It leads to capital formation.