Question

Briefly discuss five characteristics of capital market.

Answer 1

1. Flow of Capital: The capital market is a forum that facilitates the flow of capital from investors to borrowers. Investors supply funds with the hope of earning the best return on their investment. Borrowers seek funds at a reasonable cost to meet their financial needs.
2. Demand and Supply: Conditions in the capital market are the result of the interaction between demand for capital and supply of capital. Demand for capital arises from borrowers and the supply is made available by investors.
3. Financial Intermediaries: In addition to borrowers and investors, the capital market comprises financial middlemen such as banks, merchant bankers, brokers and so on. They serve as a link between borrowers and investors.
4. Financial Instruments: Several types of financial instruments are used in a capital market to facilitate the flow of capital. Equity shares, preference shares, debentures, bonds, commercial certificates, and promissory notes are examples of these instruments. These instruments are popularly known as securities. Therefore, a capital market is also called a securities market.
5. Liquidity: A capital market provides liquidity for investment in securities. Securities issued by borrowers to raise finance are negotiable. Therefore, investors can sell them whenever they need cash.
6. Trading in Securities: A capital market serves as a market where securities can be bought and sold.