Capital market is the market from where individuals, companies and Government can source long-term financing by engaging in buying and selling of securities. Capital market comprises of primary market and secondary market. In the primary market, newly issued stocks and bonds are exchanged and in the secondary market, trade of existing stocks and bonds take place.
The capital market can be divided into bond market and stock market. In the bond market, buying and selling of newly issued and existing bonds take place. In the stock market, exchange of newly issued and existing shares or stocks is carried out.
The participants in the capital market are mainly those who have a surplus of funds and those who experience fund deficits. People with surplus money want to invest in the capital market in the hope of getting high returns on their investments. On the other hand, people with fund deficits try to get financing from the capital market by selling stocks and bonds. These two kinds of activities keep the capital market going.
The capital market is characterised as the provider of long-term financing. The instruments used for this long-term financing are equity instruments, insurance instruments, derivative instruments, especially bonds.
Initial Public Offering
Companies can raise large amounts of long-term capital from the capital market by issuing Initial Public Offering (IPO). A company gets “floated” in the stock market through an IPO. Whenever a company gets financing through IPO, it has to lose some control over the company, proportional to the amount of shares that is sold to the investors. But, the company interested in issuing the IPO has to satisfy the entry standards to get a full listing in the stock market. In the past, these entry standards were quite stringent but nowadays, initiatives are taken by the stock markets to make the entry a bit easy for the new, technology-based innovative companies. New stock markets are also created with simplified entry requirements for new innovative companies. These new stock markets have all the characteristics of a public stock market and these provide the new companies with the much required access to capital.
Venture Capital in the Capital Market
Venture Capital is the fund that is raised through the capital market by specialised agents. It is one of the main sources of funding for new business companies. Venture capitalists buy bonds and shares issued by a new company. They are not interested in getting immediate dividends from the company in which they have invested. They want the companies to expand their scale of operation, which will in turn increase the value of their invested capital. So, the venture capitalists are generally interested in promoting new companies with high growth prospects.
The capital market is now becoming more global and the competition among the institutions is increasingin this era of “institutionalised” markets. A larger share of credit now flows through the channels of the capital market. Financing through the capital market involves a much easier process compared to financing through banks. Deregulation, growing competition, advanced technology and fluctuating interest rates has resulted in increased efficiency of capital markets. Capital markets now has to offer more flexible ranges of financial instruments for borrowing and raising funds, which help the borrowers and investors manage risks associated with lending and investment, in a better way.