Capital Market, Types, Example, Instruments, History, Functions

Q: What do you mean by capital market?

The capital market is a financial market where long-term securities like stocks and bonds are bought and sold.

Q: What are the 5 types of capital markets?

The five types are primary market, secondary market, debt market, equity market, and derivatives market.

Q: Which is an example of a capital market?

The Bombay Stock Exchange (BSE) is an example of a capital market.

Q: What is a primary market?

The primary market is where new securities are issued and sold to investors for the first time.

Q: What is a secondary market?

The secondary market is where already issued securities are traded among investors.

Table of Contents☰

The capital market is an important part of the financial system that provides a platform for the trading of long-term securities like stocks, bonds, debentures and other financial instruments. It provides a mechanism for businesses, industries and governments to raise long term funds for their development needs, while giving investors gaining opportunities to grow their wealth. In this article, we are going to cover capital markets, its types, its historical background and evolution as well as its functions.

Capital Markets

The Capital market provides the opportunity for transfer of funds from savers and households to entities that require capital, making sure that resources are channelled into productive investments. By allowing this flow, the capital market plays an important role in fostering economic growth, industrial development and financial stability.

Capital Markets Types

The Capital Markets have various segments that manage specific financial instruments and investment purposes. Here is a table representing the different types of capital markets:

Capital Market Type	Description	Examples
Commodities Market	Market for trading physical goods and raw materials	Multi Commodity Exchange (MCX), NCDEX
Debt Market	Market for debt instruments, providing fixed returns	Government Bonds, Corporate Bonds, Debentures
Derivatives Market	Market for trading contracts derived from underlying assets	Futures, Options, Swaps
Equity Market	Market for buying and selling company ownership shares	NSE, BSE
Foreign Exchange Market	Market for trading global currencies	Forex Market, Interbank Market
Money Market	Market for short-term borrowing and lending	Treasury Bills, Certificates of Deposit
Mortgage Market	Market for mortgage-related securities	Mortgage-Backed Securities (MBS)
Primary Market	Market where new securities are issued	IPOs, Rights Issues
Secondary Market	Market for trading existing securities	Stock Exchanges, OTC Markets

Capital Market in India

The Capital Markets in India have evolved into dynamic and regulated systems all over the world. The capital market of India can be divided into two components:

Primary Market- In this market, new securities are issued by companies and governments to raise fresh capital. This includes IPOs, right issues, private placements.
Secondary Market- In this market, existing securities are traded among investors and facilitated by major stock exchanges like the NSE and BSE.

Key institutions supporting India’s capital market include:

Stock Exchanges – NSE and BSE provide electronic platforms for trading.
Depositories – NSDL and CDSL manage the dematerialized form of securities.
Regulatory Authority – The Securities and Exchange Board of India (SEBI), established in 1988 and given statutory powers in 1992, regulates, develops, and safeguards the capital market.

Capital Market Instruments

The Capital Markets in India consist of many instruments that cater to different investment needs:

Instrument	Meaning
Bonds	Fixed-income securities issued by governments and corporations.
Debentures	Long-term instruments with fixed interest returns.
Equity Shares	Represent ownership in companies, offering dividends and voting rights.
Mutual Funds	Pooled funds invested in diversified securities.
ETFs	Exchange-traded investment baskets that mirror indices.
Preference Shares	Provide fixed dividends and priority in liquidation.
Commercial Paper	Short-term corporate borrowing instruments.
Derivatives	Risk management tools like futures, options, and swaps.
REITs and InvITs	Investment in real estate and infrastructure projects.
Treasury Bills	Short-term government securities.

Capital Market of India Historical Background

The origin of capital markets in India can be traced back on the following lines:

1875 – The Bombay Stock Exchange (BSE) was established. This was India’s first stock exchange.
1988- SEBI was created as a regulatory body.
1992- NSE was launched and SEBI got statutory empowered by introduction of electronic trading.
1996- The Depositories Act was enacted. This led to the creation of NSDL and CDSL and helped in dematerialisation.
2000s onwards- Trading reforms were liberalised, online trading was introduced and foreign institutional investors were integrated.
These reforms have made India’s capital market modern, transparent, and globally competitive.

Capital Market Functions

The capital market performs many important l functions in an economy:

Capital Mobilization: Facilitates raising of long-term funds for governments and businesses.
Investment Opportunities: Provides avenues for investors to diversify and earn returns.
Liquidity Provision: Ensures securities can be easily bought and sold.
Price Determination: Market forces establish fair and transparent security prices.
Risk Management : Derivatives and other instruments help hedge against uncertainties.
Efficient Allocation of Resources: Directs savings into productive enterprises.
Wealth Generation : Provides opportunities for individuals and institutions to accumulate wealth.
Corporate Governance : Showcases transparency and accountability in listed companies.