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What is a Capital Market? Research Team | Posted On Tuesday, April 14,2009, 10:44 AM

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What is a Capital Market?



Capital market is a market where debt or equity securities are traded. Capital markets which consist of, Primary market and Secondary market. The primary markets are where new stock and bonds issues are sold (underwriting) to investors and the secondary markets are where existing securities are sold and bought from one investor or speculator to another, generally on an exchange. Primary markets are those where securities are offered to the public in the form of subscription with the purpose of raising money. On the other hand, secondary market refers to the market where trading of already existing securities take place, the secondary market is frequently referred to as dealer market or an auction market. In a primary market, the securities, stocks or bonds are bought directly from the company but in the secondary market, the existing securities, bonds or stocks are traded again.

For a developing economy like India, debt markets are critical sources of capital funds. The debt market in India is amongst the largest in Asia, it includes government securities, public sector undertakings, other government bodies, financial institutions, banks and companies.

The capital market is the market for securities, where companies and governments can increase long term funds. Selling stock and selling bonds are two ways to create capital and long term funds. The Indian Equity Markets and the Indian Debt markets collectively form the Indian Capital markets.

The Indian Equity Market depends mainly on monsoons, global funds flowing into equities and the performance of different companies. The Indian Equity Market is almost completely dominated by two major stock exchanges -National Stock Exchange of India Ltd. (NSE) and The Bombay Stock Exchange (BSE). The benchmark indexes of the two exchanges are Nifty of NSE and Sensex of BSE is closely followed. The two exchanges also have an F&O (Futures and options) segment for trading in equity derivatives including the index.

The participants of capital market are mainly those who have a excess of funds and those who have a shortage of funds. The persons having excess money want to invest in capital market in hope of getting high returns on their investment. On the other hand, people with fund shortage try to get financing from the capital market by selling stocks and bonds.

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