Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.
Characteristics of Capital market:
1. Link between Savers and Investment Opportunities: Capital market is a crucial link between saving and investment process. The capital market transfers money from savers to entrepreneurial borrowers.
2. Deals in Long Term Investment: Capital market provides funds for long and medium term. It does not deal with channelising saving for less than one year.
3. Utilises Intermediaries: Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These intermediaries act as working organs of capital market and are very important elements of capital market.
4. Determinant of Capital Formation: The activities of capital market determine the rate of capital formation in an economy. Capital market offers attractive opportunities to those who have surplus funds so that they invest more and more in capital market and are encouraged to save more for profitable opportunities.
5. Government Rules and Regulations: The capital market operates freely but under the guidance of government policies. These markets function within the framework of government rules and regulations, e.g., stock exchange works under the regulations of SEBI which is a government body.
Differences between Money Markets and Capital Markets:
| Major Points |
Money Markets |
Capital Markets |
| Participant |
Institutional participants like RBI, banks, financial institutions and finance companies. Individual investors are permitted to transact but do not normally do so |
Financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from the members of the public. |
| Instruments |
Short term debt instruments such as T-bills, trade bills reports, commercial paper and certificate of deposit. |
Equity shares, debentures, bonds and preference shares etc. |
| Investment Outlay |
Transactions require huge sums of money and are quite expensive |
Do not require a huge financial outlay. The value of units of securities is generally low i.e. Rs. 10, 100 and minimum trading lot of shares is kept small as 50 or 100 units. |
| Duration |
Instruments usually have a maximum tenure of one year and may even be issued for a single day. |
Deals in medium and long term securities such as equity share and debentures |
| Liquidity |
Higher liquidity since the DFHI the Discount Finance House of India has been established for the specific objective of providing a ready market for these instruments. |
Considered as liquid instruments because they are marketable on the stock exchanges, However it might be difficult to find a buyer sometimes with the fluctuations of the stock market. |
| Safety |
Minimum risk and are safer since the issuers mostly are the agencies of the Government and also because of the shorter duration. |
Riskier because of the long duration and may be the issuing companies fail to perform as per the projection shown during issue. |
| Expected return |
Less |
High for long duration earnings are through dividend and bonus shares. |
