01 July 2018

Functions and Significance of a Capital Market

Capital market plays a vital role in the development by mobilising the savings to the needy corporate sector. In recent years there has been a substantial growth in the Capital Market. The Capital Market involves in various functions and significance. They are presented below:

The Capital Market functions as coordinator between savers and investors. It mobilises the savings from those who have surplus fund and divert them to the needy persons or organisations. Therefore, it acts as a facilitator of the financial resource. In this way it plays a vital role in transferring the surplus resources to deficit sectors. It increases the productivity of the industry which ultimately reflects in GDP and national income of the country. It increases the prosperity of the nation.

Motivation of Savings
The Capital Market provides a wide range of financial instruments at all times. India has a vast number of individual savers and the crores of rupees are available with them. These resources can be attracted by the capital market with nature. The banks and non-banking financial institutions motivate the people to save more and more. In less developed countries, there is no efficient capital market to tap the savings. In underdeveloped countries there are very little savings due to various factors. In those countries they invest mostly in unproductive sector.

Transformation of Investment

The Capital Market is a place where the savings are mobilised from various sources, is at the disposal of businessmen and the government. It facilitates lending to the corporate sector and the government. It diverts the savings amount towards capital formation of the corporate sector. It creates assets by helping the industry. Thus, it enhances the productivity and leads to industrialisation. The industrial development of the country depends upon the dynamic nature of the capital market. It also provides facilities through banks and non-banking financial institutions. The development of financial institutions made the way easy to capital market. The capital has become more mobile. The interest rate fall lead to an increase in the investment.

Enhances economic growth
The development of the Capital Market is influenced by many factors like the level of savings with the public, per capita income, purchasing capacity, and the general condition of the economy. The capital market smoothens and accelerates the process of economic growth. The Capital Market consists of various institutions like banking and non-banking financial institutions. It allocates the resources very cautiously in accordance with the development of needs of the country. The balanced and proper allocation of the financial resources leads to the expansion of the industrial sector. Therefore, it promotes the balances regional development. All regions should be developed in the country.

The Capital Market provides a stable security prices in the stock market. It tends to stabilise the value of stocks and securities. It reduces the fluctuations in the prices to the minimum level. The process of stabilisation is facilitated by providing funds to the borrowers at a lower interest rate. The speculative prices in the stock market can be reduced by supply of funds. The flow of funds towards secondary market reduces the prices at certain level. Therefore, the Capital Market provides funds to the stock market at a low rate of interest.

Advantages to the Investors
The investors who have surplus funds can invest in long-term financial instruments. In Capital Market, a number of long-term financial instruments are available to the investor at any time. Hence, the investors can lend their money in the Capital Market at reasonable rate of interest. The Capital Market helps the investors in many ways. It is the coordinator to bring the buyer and seller at one place and ensure the marketability of investments. The stock market prices are published in newspapers everyday which enables the investor to keep track of their investments and channelize them into most profitable way. The Capital Market safeguards the interest of the investors by compensating from the stock exchange compensating fund in case of fraud and default.

The development of the Capital Market is the indicator of the development of a nation. The prosperity and wealth of a nation depends, upon the dynamic capital market. It not only reflects the general condition of the economy but also smoothens and accelerates the process of economic growth. It consists a number of institutions, allocates the resources rationally in accordance with the development needs of the country. A good allocation of resources leads to expansion of trade and industry. It helps both public and private sector.

Generally, the corporate sector requires funds not only for meeting their long-term requirements of funds for their new projects modernisation, expansion and diversification programmes but also for covering their operational needs. Therefore, their requirement of capital is classified as given below:
a. Long-term capital
b. Short-term capital
c. Venture capital
d. Export capital

Long-term capital represents the amount of capital invested in the form of fixed assets. Fixed assets are such as land, building, plant and machinery necessary for every company at the initial stage of the commencement of the production. Heavy amount of capital is required by the companies when they are going for modernisation or expansion or diversification. Therefore, the requirement of long-term capital is supplied by the capital market. This is also referred to as Fixed Capital. Usually the corporate sector mobilises the fixed capital from the Capital Market through various long-term maturity financial instruments. Therefore, it provides adequate funds to the corporate sector by offering various financial instruments. They mobilise the funds through issue of Equity shares. Preference shares, debentures, bonds etc. These financial instruments have a longer maturity period and they are treated by the companies as permanent capital. Some instruments have no maturity until the close down of a business unit.

Short-term capital represents the amount of capital invested in current assets. The Current Assets consist of cash, bank balances, inventory, debtors etc. The short-term capital is required to meet the need of working capital of the corporate sector. Working capital is required for meeting the operating cost of the business concern. They are required to pay different amounts to different parties as per their schedule. Hence, they procure the working capital from the commercial banks. In India a majority of the corporate sector is funded by the banks through different modes of finance. The working capital is known as circulating capital. An adequate supply of working capital leads to smooth functioning of production of goods. There are some other avenues available to the corporate sector to meet the needs of the working capital.

Venture capital is the capital which invested in highly risky ventures. It is also known as seed capital. It is a quite recent entrant in the capital market. It has great significance in helping technocrat entrepreneurs at the commencement stage of the concern. It has technical expertise. But it lacks finance.

Export capital refers for making payment in International Trade. The payment of international trade involves in bills of exchange and other instruments.

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