Question

Explain the features of Capital Market.

Answer in brief.

State any four features of Capital Market.

Answer 1

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. The 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.