Finance

Functions Of Capital Market Plus Example

I will educate you on the functions of capital market we have and also the examples in the world or in a country’s economy.

When it comes to financial market capital market is very essential as one can buy share, collect loan for a business, make investments and buy funds.

Defintion of capital market: This a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market instruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market.

Functions of Capital market which involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. Let’s look into the functions of capital market in an economy.

Functions of Capital Market

Functions of capital market

There are various functions of capital market  but i will mention the most importance of them here.

Encourages Savings

The first major functions of capital market is that they encourage savings in a country’s economy. With the development of capital, market, the banking and non-banking institutions provide facilities, which encourage people to save more. In the less- developed countries, in the absence of a capital market, there are very little savings and those who save often invest their savings in unproductive and wasteful directions, i.e., in real estate (like land, gold, and jewellery) and conspicuous consumption.

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Increase in Investment

The capital market facilitates lending to the businessmen and the government and thus encourages investment. It provides facilities through banks and nonbank financial institutions. Various financial assets, e.g., shares, securities, bonds, etc., induce savers to lend to the govern­ment or invest in industry. With the development of financial institutions, capital becomes more mobile, interest rate falls and investment increases.

Capital Formation

Another functions of capital market is the capital formation. Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation.

Help in Economic Growth and Development of a Country

This is why a major functions of capital market, helping in economic growth and development. Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure.

Help in Price Stability

Another functions of capital market we is price stability. The capital market tends to stabilise the values of stocks and securities and reduce the fluctuations in the prices to the minimum. The process of stabilisation is facilitated by providing capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities.

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Helps in Allocation of Fund

Not only does the Capital market help mobilize dormant finances, but the competency of the shareholders makes sure that the available funds are invested into the right causes.

Other functions of capital market we includes the following;

  • Mobilization of savings to finance long term investments.
  • Facilitates trading of securities.
  • Minimization of transaction and information cost.
  • Encourage wide range of ownership of productive assets.
  • Quick valuation of financial instruments like shares and debentures.
  • Facilitates transaction settlement, as per the definite time schedules.
  • Offering insurance against market or price risk, through derivative trading.
  • Improvement in the effectiveness of capital allocation, with the help of competitive price mechanism.
  • Capital market can utilize them by bringing new life into different industries such as agriculture or energy.
  • The Capital market offers loans to all the big industries, as well as consulting services, etc.
  • Capital market helps funds to remain constantly available for potential investments.
  • Shareholders can enjoy high rates and the gratifying feeling of helping the national economy. The SECF also compensates their investments in case of fraud. Even more so, the shareholders can easily keep track of all their financial assets and have complete freedom to change their securities
  • Provide advice to investors as to which investments are viable.
  • Facilitating the liquidation and marketing of a long term.
  • Acting as a channel through which foreign investments find their way into the market.

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These are the functions of capital market and i believe that they are adequate for your studies. Don’t forget to share this post thanks.

 

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