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Question
Answer the following question
State the features of capital market.
Solution
It is the market for borrowing and lending long-term capital required by business enterprises. As per SEBI, the capital market is a market for long-term debt and equity shares.
The features of the capital market are as follows:
1) LINK BETWEEN INVESTORS AND BORROWERS: The capital market links investors with the borrowers of funds. It routes money from savers to entrepreneurial borrowers.
2) DEALS IN MEDIUM AND LONG-TERM INVESTMENT: In the capital market, medium and long-term financial instruments are traded. Through this market, corporates, industrial organisations, financial institutions access long-term funds from both, domestic as well as foreign markets.
3) PRESENCE OF INTERMEDIARIES: Capital market operates with the help of intermediaries. The intermediaries like brokers, underwriters, merchant bankers, collection bankers, etc. play an important role in the capital market.
4) PROMOTES CAPITAL FORMATION: Capital market provides a platform for investors and borrowers of long-term funds to engage in trade. This leads to capital formation in the economy as it mobilises funds.
5) REGULATED BY GOVERNMENT RULES, REGULATIONS, AND POLICIES: Capital market operates freely. However, it is regulated by government rules, regulations, and policies. E.g.: SEBI is the regulator of Capital markets.
6) DEALS IN MARKETABLE AND NON-MARKETABLE SECURITIES: It trades in both, marketable and non-marketable securities. Marketable securities are securities that can be transferred. E.g.: shares, debentures, etc. Non-marketable securities are those which cannot be transferred. E.g.: term deposits, loans, and advances.
7) VARIETY OF INVESTORS: It has a wide variety of investors including both, individuals (i.e. general public) and institutional investors like mutual funds, insurance companies, financial institutions, etc.
8) RISK: Risk is very high as the instruments have long maturity periods. But along with that, the return on investments is also very high.
9) INSTRUMENTS: Equity shares, preference shares, debentures, bonds, government securities and public deposits are the main instruments in capital market.
10) TYPES: Capital market is mainly classified into two main types, government securities market or gilt-edged market and industrial securities market. Industrial securities market is further classified into the primary and secondary markets.
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