Capital Market — Meaning and Features

The capital market may be defined as the segment of the financial market that deals in medium- and long-term funds — funds raised for a period exceeding one year, and, in the case of equity share capital, funds that carry no fixed repayment date at all. It is the capital market, not the money market, that a company turns to for the fixed-capital needs studied throughout the earlier chapters of this syllabus: financing land, buildings, plant and machinery, and long-term business expansion, through the issue of shares, debentures and bonds.

The capital market has several features that distinguish it from the money market. It deals in medium- and long-term instruments rather than short-term ones, and correspondingly carries a higher level of risk for the investor, since a longer time horizon means more can genuinely go wrong before the investment matures or is realised — but this higher risk is also, in principle, compensated by a higher potential return than the money market's low-risk, low-return instruments offer. It is, in comparison to the money market, a somewhat less liquid market for any single transaction, but the existence of an organised secondary market — the stock exchange — restores a meaningful degree of liquidity, since an investor who wishes to exit before an instrument's actual maturity (or, for equity, at any time at all) can generally sell it to another investor there rather than being forced to hold it. The capital market has two distinct components, already introduced in this chapter — the primary market, where new securities are issued and the issuing company receives the funds directly, and the secondary market, where existing securities already held by investors change hands among themselves. It draws in a genuinely wide base of participants, ranging from individual retail investors and high-net-worth individuals to institutional investors such as mutual funds, insurance companies, banks, and foreign portfolio investors — a considerably broader base than the largely institutional money market. …