Question

Briefly explain the functions of Capital Market.

Answer 1

1. Savings and Capital Formation: In capital market, various types of securities help to mobilize savings from various sectors of the population (Individuals, Corporate, Govt., etc.). The twin features of reasonable return and liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the capital formation in the country.
2. Permanent Capital: The existence of a capital market/stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently.
3. Industrial Growth: The stock exchange is a central market through which resources are transferred to the industrial sector of the economy.
4. Beady and Continuous Market: The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities.
5. Reliable Guide to Performance: The capital market serves as a reliable guide to the
   performance and financial position of corporate, and thereby promotes efficiency.
6. Proper Channelization of Funds: The prevailing market price of a security and relative yield are the guiding factors for the people to channelize their funds in a particular company.
7. Provision of Variety of Services: The financial institutions functioning in the capital market provide a variety of services such as grant of long term and medium-term loans to entrepreneurs.
8. Development of Backward Areas: Capital Markets provide funds for projects in backward areas. This facilitates economic development of backward areas.
9. Foreign Capital: Capital markets make it possible to generate foreign capital. Indian firms are able to generate capital funds from overseas markets by way of bonds and other securities.
10. Easy Liquidity: With the help of the secondary market investors can sell off their holdings and convert them into liquid cash.