Capital Markets: How Money Moves and Investments Grow?

Capital Markets: How Money Moves and Investments Grow?

A successful business requires short-term and long-term funding for the company to grow. Where the short-term budgets fulfill the short-term requirements, the country's commercial development requires long-term capital that the capital markets complete. 

It plays a vital role in the global economy by facilitating the flow of funds between investors and borrowers. These markets provide a platform for individuals, corporations, and governments to raise capital for various purposes while offering opportunities for investors to grow their wealth.

Understanding Capital Markets
 

Financial markets where long-term debt and equity securities are bought and sold are called Capital markets. The capital market is made up of a primary market and a secondary market. Capital markets include stock exchanges, bond markets, and other platforms where financial instruments are traded.

Participants of Capital Market in India 

The capital market is vast and cannot be handled by a single person and includes various participants who make the functioning of the capital markets very smooth. Here is a list of participants who takes part in the market: 

Stock Exchange

The stock exchange is responsible for facilitating the sale and purchase of stocks in an efficient, fair, and transparent manner while enforcing rules and regulations for publicly listed companies and trading participants. 

Investors

Investors are those who own shares of stock in a publicly listed company and are classified as either retail or institutional, and local or foreign. 

Stockbrokers

Stockbrokers act as agents between buyers and sellers of stocks, executing orders to the advantage of their clients. 

Listed Companies

Listed companies have qualified with stringent listing and reportorial requirements and have gone through an IPO or listing by introduction. 

Clearing Houses

Clearing houses ensure the orderly settlement of equity trades executed at the exchange, 

Depositories

Depositories act as securities custodians of listed shares of stock.

Settlement Banks

Settlement banks accept deposits of funds for payment of securities bought and confirm payments of due clearing obligations.

Transfer Agents

Stock transfer agents maintain shareholder records and facilitate the transfer of ownership. They also handle corporate actions such as dividends, stock splits, and proxy forms.

Types of Capital Markets

Now that we know what a capital market is and who participates in it, we should know that the vast capital market is divided into two parts:

Primary market

The Primary capital market is also known as the ‘New issues market’ where the government or businesses issues new financial instruments to trade.

Equities and  Debts are the major financial instruments issued in the market for trade.

Secondary market

The secondary market is different from the primary market, and trade of the existing stocks and debt occurs here.
 

Factors Influencing Capital Markets
 

Several factors influence the functioning of capital markets and the movement of money. These include: 

• economic conditions
• interest rates
• government policies
• geopolitical events
• technological advancements 
• investor sentiment

Changes in these factors can impact the demand and supply of securities, affecting their prices and overall market performance.
 

Money Moves in Capital Markets
 

Capital markets enable money movement from savers and investors to borrowers and issuers. 

Savers, such as individuals or institutional investors, provide funds by purchasing securities issued by borrowers, such as corporations or governments. 

This process allows borrowers to raise capital for various purposes, such as financing business expansion, funding infrastructure projects, or managing government deficits.

Investments Grow in Capital Markets
 

Investors participate in capital markets to grow their wealth over time. They can achieve this through various investment vehicles in capital markets, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and derivatives. 

These investment options offer different risk and return profiles, allowing investors to diversify their portfolios and potentially earn higher returns.

Key Components of Capital Markets

1. Stock Market

The stock market is a primary component of capital markets, where shares of publicly traded companies are bought and sold. Investors can purchase stocks to become partial owners of these companies and potentially benefit from their growth and profitability.

2. Bond Market

The bond market is another important segment of capital markets where debt securities are traded. Bonds are fixed-income instruments representing loans made by investors to borrowers, typically governments or corporations. Investors earn interest on bonds and receive the principal amount back upon maturity.

3. Derivatives Market

The derivatives market consists of financial contracts whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. Derivatives like options and futures allow investors to hedge against risks or speculate on price movements.

4. Mutual Funds and ETFs

Mutual funds and ETFs pool money from multiple investors to invest in a diversified portfolio of securities. These investment vehicles offer individual investors access to various assets and professional management.

5. Investment Banks and Brokerage Firms

Investment banks and brokerage firms play a crucial role in capital markets by facilitating the buying and selling of securities. They provide services such as underwriting new securities, executing trades, and offering investment advice to clients.
 

Regulators of capital market

The capital market is majorly regulated by 

• The Ministry of Finance of India oversees and regulates the capital markets. Therefore, the capital market is governed by India's major regulatory bodies, namely the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

• Under the Ministry of Finance, the Department of Economic Affairs' Capital Markets Division oversees the capital market.
   

The division is in charge of these things:

• Securities market institutional changes

• establishing market and regulatory institutions
• enhancing the mechanism for investor protection
• establishing effective regulatory frameworks for the securities markets
   

Capital Market and Money market

Conclusion 

Capital markets serve as the backbone of the global financial system, enabling the movement of money and the growth of investments. Individuals and institutions can participate in these markets through various investment vehicles and platforms to raise capital or grow their wealth. 
 

Frequently Asked Questions

1. What is capital market function?

Ans: Capital markets play a crucial role in facilitating the flow of funds from savers to investors, promoting economic growth and development, and acting as the link between savers and investors.
  

2. What is the growth of capital markets?
Ans: Capital growth is the increase in the value of the assets or investment, measured as the difference between the purchase price and the current market value.

3. What is the relationship between money and capital market?
Ans: Both the capital and money markets are active when financial assets or capital are in debt. By lending and borrowing money, the trade-in money market maintains a steady flow of capital among businesses, governments, financial institutions, and banks. The trade is executed in both stocks and bonds on the capital market.

4. What are the 4 major capital markets?

Ans: The 4 major capital markets are:

1. Commodities Market
2. Mortgage Market
3. Primary Market
4. Secondary market

5. What is SEBI in capital market?

Ans: SEBI is a watchdog for the Indian securities and capital market. The financial regulatory body reports to the Ministry of Finance and is responsible for regulating and monitoring the capital market.