The Capital market serves medium and long-term funds for the business. It includes Shares, Debentures, Bonds, Mutual Funds, Government Securities, etc.
Meaning of Capital Market:
A capital market is a market where buyers and sellers involved in trade (buy and sell debt and equity)of financial securities. Examples of capital markets are American Stock Exchange, London Stock Exchange, New York Stock Exchange. Secondly, It covers transferring the money from savers to entrepreneurial borrowers.
Definition:
“Capital market can be defined as the mechanism which channelizes savings into investment or productive use. It intermediates flow of savings of those who save a part of their income from those who want to invest it in productive assets”.
-V.K.Bhalla
Components of Capital Market:
The components are as follows:
1. Primary Market:
The New Issue Market/Primary Market is issued securities for the first time. It directly contributes to capital formation. In the capital market, the company utilizes these funds for investment in buildings, plants, machinery, etc. The primary market issued common securities such as equity shares, debentures, bonds, preference shares, etc.
In this market the securities are issued by the following methods:
1. Public Issue through Prospectus:
When companies involve middlemen/intermediaries such as bankers, brokers, and underwriters to raise funds from the general public is considered a public issue through the prospectus.
2. Offer for Sale:
In this, new securities are offered to the General Public by an intermediary (firms of brokers) who buys a full lot of securities from the company. Firstly, the company issues securities to the intermediary at face value. Then intermediaries issue securities to the general public at a higher price to earn profit.
3. Private Placement:
The securities are sold by the company to an intermediary at a fixed price and then intermediaries sell these securities not to the general public but to selected clients at a higher price.
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The company issue prospectus with its objectives. In this method, the intermediaries issue securities to selected clients such as UTI, LIC, General Insurance, etc.
4. Right Issue (For Existing Companies):
Before subscribing to outsiders the company must offer them the new stock of securities. This is compulsory for companies under the Companies Act 1956.
5. E-IPOs, (electronic Initial Public Offer):
It is the new method of issuing securities in the online system of the stock exchange. The company appoints registered brokers for accepting applications and placing orders electronically.
2. Secondary Market (Stock Exchange):
The secondary market is the market where the sale and purchase of previously issued securities take place. In the secondary market, the securities are sold by Existing investors to other investors.
When the investor is in need of cash and if the other investor wants to buy the shares of the company then both the investors can meet in the secondary market and exchange securities for cash from the broker.
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