Meaning and Features of the Capital Market

Every business, once it grows beyond its day-to-day cash needs, eventually needs long-term funds — money to buy land and buildings, install machinery, set up a new plant, or repay an earlier loan — funds that will stay locked into the business for years, not days. Raising this kind of money is what the capital market exists for.

The capital market is the segment of the financial market that deals in medium- and long-term funds, generally with a maturity period of more than one year (often five, ten years, or even funds that are never "repaid" at all, as with equity share capital). It brings together those who have long-term savings to invest — households, institutions, mutual funds, insurance companies — and those who need long-term funds — companies wanting to expand or modernise, and governments financing long-term development expenditure. Unlike the money market, which deals in short-term, highly liquid instruments to meet working-capital needs, the capital market deals in instruments meant to fund fixed capital and long-term working capital requirements.

Features of the capital market:

• Deals in long-term securities — equity shares, preference shares, debentures, bonds and government securities, all with a maturity beyond one year (or, for equity, no fixed maturity at all).
• Has two closely linked segments — the primary market (where new securities are issued for the first time) and the secondary market (where already-issued securities are subsequently traded among investors).
• Connects savers to users of capital — it channels the savings of individuals and institutions into productive investment by companies and governments.
• Involves a network of institutions — merchant bankers, underwriters, stock exchanges, depositories, mutual funds and credit rating agencies, all of whom help the market function smoothly.
• Carries relatively higher risk, and correspondingly the potential for higher return, compared to the money market, since long-term commitments are exposed to greater business and economic uncertainty over time.
• Regulated in India principally by the Securities and Exchange Board of India (SEBI), under the SEBI Act, 1992, which frames rules for issuers, intermediaries and stock exchanges alike to protect investors and keep the market orderly. The same capital-market principles taught across Indian commerce syllabi, including CBSE, draw on this same regulatory and statutory framework — the treatment here is TN's own, but the underlying law and market structure are common ground across boards.