In an economy, there exist two types of financial markets, namely, money market and capital market. The money market deals with commodities that provide short-term funds. While, capital markets are concerned with financial instruments and commodities that are of long-term in nature, having a maturity period of more than a year.
Capital markets are places where transactions are conducted between B2B Suppliers of capital and individuals or businesses who are in need of capital. The suppliers can be retail or institutional investors while the capital seekers include businesses, individuals or governments. There are two types of capital markets they are Primary Market and Secondary Market.
Primary Market
In the primary market, the commodities that are exchanged are issued for the first time. The primary market is also known as the new issues market. It facilitates both initial public offering and further public offering.
The most important function of a primary market is to provide capital formation for companies, institutions and governments. It also enables investors to invest their surplus amount in new ventures.
The companies raise funds in the primary market through issuing of shares, debentures, preference shares. In such a market, the funds will be disbursed in the form of prospectus, rights issue, e-IPO, preferential issue and private placement of securities.
Secondary Market
A secondary market is popularly known as the stock market or stock exchange. It is a market which facilitates the trading of existing securities only. It provides a safe place for transaction both for investors and those seeking investment. The example of stock exchanges are NSE, NASDAQ etc.
Functions of Capital Market
The capital market has the following functions:
- Financing of long-term investments by mobilizing savings.
- Facilitate trading of security
- Creating liquidity in the market
- Encourage setting up of new companies and contributing to economic growth
- Facilitates transaction within defined time schedules
- Provide a quick valuation of financial instruments such as shares and debentures
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