Types Of Capital Market: For all beginners who are keen to learn about the stock market, it is essential to know the working mechanism of the stock market before entering into it without proper knowledge. The capital market, which is also called the stock market, is the place where financial securities are traded.
In this blog, let us try to learn what capital market is, how the capital market works along with its types of capital market, features, and functions. Keep reading to find out more!
Meaning Of Capital Market
The term capital market refers to the place where financial instruments are bought and sold between two parties, one who has excess funds to lend and the other who is looking to raise capital. The participants in the capital markets include retail investors like you and me along with big institutions such as banks, businesses, insurance companies, and even the government.
There are two categories of markets i.e, Primary markets and secondary markets. In these markets, various types of securities such as equities and debt are traded. In the upcoming sections, we will dive deeper into the details.
How does the Capital Market work?
Let us understand how the capital market works in a simple way with an example. A company needs funds for several purposes such as the expansion of business, purchase of new assets, diversification of business, etc. As it requires huge capital investment for this, the company raises funds by selling shares to the public in the capital market.
The place where the company issues shares for the first time is called the primary market and the procedure to issue the shares for the first to the public is called an Initial Public Offer (IPO). Once the shares are issued through IPO they get listed on the stock exchanges and are eligible to trade in stock exchanges.
After the IPO, shares can be freely traded in the secondary market. A secondary market is a place where existing shares are bought and sold with the help of a stock exchange.
People or institutions who facilitate such buying and selling of shares are called stock brokers. In India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two stock exchanges where we can buy and sell shares.
Features of Capital Market
- Mobilization of Savings: The Capital market helps in the mobilization of funds in the economy by converting the savings into investments. The companies utilize these funds to expand and grow their business and the growth of businesses indirectly helps in wealth creation in the country.
- Regulated Platform: The capital market in India is regulated by the Securities and Exchange Board of India (SEBI), a statutory body established by the Government of India and operates within the framework of certain rules. Thus investors’ interest is completely safeguarded.
- Long-term Market: The capital market helps in financing the medium and long-term needs of the company through the issue of instruments like shares, bonds, IPOs, etc.
Types Of Capital Market
Now that we are having a fair picture of the capital market, let us see the types of capital markets. The Capital Market is broadly classified into two types:
Types Of Capital Market #1 – Primary Market
The primary market is the place where the companies issue their shares for the first time to the public through an Initial Public Offer (IPO). Hence it is also called the New Issue Market. Once the issue of the IPO is successful then the shares of the company get listed on the stock exchange.
A few recent examples of such IPOs in the Primary market include Avalon Technologies Ltd, Mankind Pharma Ltd, and many others.
In the case of Bonds issue, it is done with the help of an underwriter, here underwriter acts as an intermediary between the company and the public. The underwriter buys bonds from the company and then sells them to the public at a bit higher price.
Types of Issues in the Primary Market
- Public issue: It is the most common way of issuing shares to the public for the first time through an Initial Public Offer (IPO).
- Private Placement: Here, the company offers securities to a selected group of investors.
- Rights issue: If the company issues extra shares to the existing shareholders at a predetermined price, it is called a rights issue
- Bonus issue: If the company offers free shares to the existing shareholders it is called a bonus issue.
Types Of Capital Market #2 – Secondary Market
The secondary market, which is commonly known as the stock market, is the place where existing or old shares are bought and sold easily from one person to another without the intervention of issuing companies.
For example, if you want to buy the shares of X Co Ltd, it is not necessary for X Co to issue shares, you can buy them from any seller in the market.
With respect to bonds in secondary markets, they are usually held for a longer time period, typically up to the maturity of the bonds which can range between 5 years to 20 years or even longer.
Difference Between Primary and Secondary Capital Market
|Sl no||Basis of Differences||Primary Market||Secondary Market|
|1.||Type of Issue||It is a new issue market and securities are issued for the first time to the public.||Existing old securities are traded in the secondary market.|
|2.||Liquidity||The primary market does not provide liquidity as buying an IPO from the company is a lengthy procedure.||In the secondary market, any person can buy or sell securities to others, ensuring liquidity.|
|3.||Transferability||Securities are not transferable from one person to another||Securities are easily transferable from one person to another|
|4.||Generation of Income from the sale of Securities||Here the buyer purchases securities directly from the company, thus the company can generate income by selling the shares.||In the secondary market, securities are freely traded in the stock market. Thus sale proceedings generate revenue for the investor.|
|5.||Price Volatility of Securities||The price of the security remains fixed in the primary market for the IPO||The price of the securities fluctuates based on the demand and supply factors.|
|6.||Intermediaries||The new issue market involves multiple intermediaries like SEBI, lead managers, underwriters, registrars, etc for the issue of IPO||In the secondary market, there are only two intermediaries present to facilitate the trading, stockbrokers and stock exchanges.|
|7.||Instruments||All the IPOs and newly issued bonds.||Shares, Derivatives, Commodities, etc.|
|8.||Functions||Primary market functions include services like new issues and Underwriting services.||Secondary market functions mainly as an intermediary between traders and stock exchanges to facilitate trading.|
|9||External risk||Newly issued shares are exposed to less risk because the subscription of IPO is the major risk associated with these securities.||The securities in the secondary market are highly risky as they are subjected to multiple external factors.|
In this blog, we have covered in detail what is a capital market and types of capital market, what are its features and who are the intermediaries involved in it.
But to make an efficient investment decision along with understanding the system in the stock market we must also make proper research before investing our hard-earned money. That’s all for this blog, I hope it gives you an insight into the stock market. Happy learning!
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