The capital market constitutes a division within the financial market where various long-term securities, including stocks, bonds, and other financial instruments, are traded. This platform serves as a means for businesses and governments to acquire capital while enabling investors to engage in trading these securities for potential returns. An essential function of the capital market is to facilitate the flow of funds from individuals who save to entities in need of financing, consequently supporting enduring investments in the economy.

 Types of Capital Market

These distinct categories of these markets offer opportunities for investors to engage in diverse financial instruments, trade securities, and access various sectors of the economy.

Capital Market Overview in India

The capital market in India pertains to the sector of the financial market dealing with long-term securities like stocks and bonds. Below are insights into the structure and historical progression of the Indian capital market:

Structure of the Indian Capital Market

Primary Market: In India, the primary market entails the initial issuance of new securities to the public. This encompasses Initial Public Offerings (IPOs), rights issues, and private placements. Oversight of the primary market is carried out by the Securities and Exchange Board of India (SEBI).

Secondary Market: The secondary market is where already issued securities are traded among investors. It incorporates stock exchanges, notably the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), facilitating the trading of equity shares, bonds, and other securities. SEBI also oversees the operations of the secondary market.

Stock Exchanges: India’s major stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These exchanges offer electronic trading platforms for securities transactions, contributing to price determination, liquidity enhancement, and equitable and transparent trading practices.

Securities Depositories: The National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL) function as central securities depositories in India. They streamline the electronic holding and settlement of securities, obviating the need for physical certificates.

Regulatory Authorities: SEBI is the regulatory authority governing India’s market. It oversees the functioning of stock exchanges, brokers, investment banks, and intermediaries. SEBI formulates regulations, monitors market activities, and safeguards the interests of investors while ensuring market integrity.

Instruments in Capital Market

These instruments offer a range of opportunities for individuals and institutions to invest, raise capital, manage risks, and engage in the Indian capital market.

Historical Evolution of the Indian Capital Market

The Indian capital market has undergone substantial evolution, with pivotal milestones including:

• Establishment of the Bombay Stock Exchange (BSE) in 1875 as India’s inaugural stock exchange. What began as a consortium of stockbrokers grew to become a prominent Asian stock exchange. Founding of the Securities and Exchange Board of India (SEBI) in 1988, authorized to regulate the securities market.
• It was empowered in 1992 with statutory authority to develop and oversee the capital market. Inception of the National Stock Exchange (NSE) in 1992, a technology-driven exchange introducing transparent and efficient trading through electronic systems and innovative products. Implementation of the Depository Act in 1996 leading to the establishment of NSDL and CDSL.
• This facilitated the dematerialization and electronic settlement of securities, enhancing efficiency and security.
• Enactment of reforms and liberalization measures, including online trading initiation, demutualization of stock exchanges, and gradual opening of the capital market to foreign investors.
• These advancements have fostered the growth and maturation of India’s market, rendering it a crucial platform for capital mobilization and investment facilitation within the nation.

Functions of Capital Markets

The functions performed by capital markets are diverse and contribute significantly to the effective allocation of capital and the advancement of economic growth. Here are the primary roles that capital markets fulfill:

Capital Mobilization: Capital markets serve as a platform where entities such as businesses, governments, and others can secure long-term capital by issuing securities like stocks and bonds. This avenue enables them to finance ventures, expand their endeavors, support projects, and foster economic progress.

Investment Opportunities: Within capital markets, a broad array of investment prospects is available to both individuals and institutions. Investors can partake in the capital market by acquiring securities and earning returns in the form of dividends, interest payments, and capital appreciation.

Liquidity Provision: Facilitating liquidity is another key role of capital markets, allowing investors to smoothly trade securities. The secondary market facilitates the transfer of securities, granting investors the ability to convert investments into cash when required.

Price Determination: The process of price discovery is facilitated by capital markets, where buyers and sellers interact to establish fair security prices. The equilibrium between supply and demand dictates these prices, reflecting perceived value and market sentiment.

Risk Management: Capital markets offer instruments like derivatives that enable investors to mitigate risks associated with market uncertainties, interest rate shifts, and price fluctuations. These risk management tools help in hedging and transferring risk exposure.

Efficient Capital Allocation: Efficient capital allocation is a pivotal function of capital markets. Investors direct funds toward enterprises and projects displaying strong growth potential, which enhances resource allocation and economic efficiency.

Wealth Generation and Distribution: Participation in wealth generation is made possible by capital markets for both individuals and institutions. Through investments in securities, the opportunity to accumulate wealth and earn returns is extended, thus contributing to wealth distribution and economic inclusivity.

Corporate Governance and Transparency: Listed companies in capital markets are mandated to adhere to transparency and accountability standards, which promotes good corporate governance. This requirement fosters transparency, accountability, and investor trust in the financial system.

In summary, the roles carried out by these markets, including mobilizing savings, supporting investment, managing risks, efficiently allocating capital, and promoting economic growth, are of utmost importance.