Capital market as the name suggests refers to that market where one can raise capital through various securities like equity stock, preference shares, bonds, debentures and many other instruments. Given below are some of the features of capital market –
- Capital market are big markets and hence companies which require funds in huge amounts will only go for raising capital through capital markets. Hence for example if a company requires $50000 then it will take bank loan or loan from some financial institution and there is no need to go to capital market for such small funds requirements.
- In capital markets funds are raised for long period and not for short term and hence companies which raise funds through equity issue or bond issue use funds arising out of such issue for long period of time ranging from 5 year to 25 years (in case of equity it is even more).
- Another feature of capital market is that they are highly regulated because these markets form the backbone of economy and also these markets help in capital formation and therefore any problem in these markets can lead to major problem for economic and financial condition of the country.
- Another feature of capital market is liquidity; these markets are very liquid because of presence of many parties like banks, mutual funds, retail investors, hedge funds and so on. Hence investors who are looking to exit from their investments can do so anytime unlike other markets like real estate, commodity etc…, which are illiquid and therefore the investor cannot sell his or her investments when he or she wants and has to sell the investment at discounted price to market due to lack of liquidity.
- In capital markets variety of instruments are available and hence there is lot of flexibility so as an investor one can invest in bonds, debenture, equity stock, futures and options and many more depending on his or her risk taking capacity and future planning and as an company looking to raise funds can raise funds in many ways like company which is highly leverage can raise funds through equity route and company which are less leveraged can raise funds through bond or debenture issue.
As one can see from the above that capital market are very important for not only economic well being of the country but also for the social well being of the people because there is positive correlation between economy and social well being of people, higher the economic development better will be the social well being of people and vice- versa.