Types of Capital Market - Explained | Bajaj Finance (2024)

Capital markets refer to the platform where businesses and governments can raise funds by issuing and trading financial assets. There are two primary types of capital markets – debt market and equity market – that help businesses raise capital for their growth and development. In this article, we discuss the different types of capital markets.

Equity market

The equity market, also known as the stock market, is the platform where businesses issue shares to investors in exchange for their investment. When investors purchase shares of a business, they become partial owners of the company, allowing them to participate in the company's profits and decision-making. The stock market is ideal for businesses that want to raise a significant amount of capital and increase public awareness of their operations.

Debt market

The debt market is where businesses issue bonds, debentures, or other forms of long-term debt securities to investors. Investors lend money to the business, which is repaid with interest at a predetermined future date. The bond market is ideal for businesses that want to raise funds for specific long-term projects, as the securities have a longer maturity date than other capital market instruments.

Foreign exchange market

The foreign exchange market, also known as forex, is the platform for buying and selling currencies. The forex market is essential for businesses that operate internationally and want to hedge their foreign currency risks. It is also essential for businesses that participate in international trade, as the forex market provides a platform to convert foreign currency into the domestic currency.

Commodity market

The commodity market is the platform where businesses can buy and sell commodities such as gold, silver,oil, and agricultural products. The commodity market is ideal for businesses that want to trade and hedging strategies for their raw material inputs, such asagricultural companies, and oil and gas companies.

Capital markets offer businesses a platform to raise funds through equity or debt financing. However, business loans offer a better option for small and medium-sized businesses. Business loans are more accessible, easier to obtain, and have flexible repayment options. They allow business owners to retain ownership and control over their business and they come with lower costs. Business owners should weigh their options and choose the right financing option that suits their unique needs.

Key elements of a capital market

Here are the key elements of a capital market:

  1. Issuers: The issuers are companies or governments that sell securities to raise capital. Companies issue stocks, bonds, debentures, or other types of securities, while governments raise money by issuing bonds or Treasury bills.
  2. Regulators: Capital markets operate under strict regulations from governing bodies, such as the Securities and Exchange Board of India (SEBI). These regulators are responsible for ensuring that capital markets operate fairly and transparently.
  3. Intermediaries: Intermediaries facilitate the transaction of securities between buyers and sellers, such as stockbrokers, investment banks, and asset management companies. They provide essential services such as underwriting, market-making, and distribution of securities.
  4. Investors: Investors are individuals or institutions that purchase securities in the capital market. They include retail investors, institutional investors, mutual funds, pension funds, and hedge funds.
  5. Exchanges: Capital markets operate through exchanges, which are platforms that allow the trading of securities between buyers and sellers. In India, the major stock exchanges include the Bombay Stock Exchange and the National Stock Exchange.
  6. Securities: Securities are the financial instruments traded on capital markets, including stocks, bonds, debentures, mutual funds, and exchange-traded funds.
  7. Price discovery mechanism: Capital markets establish the prices of securities through a price discovery mechanism. This mechanism enables buyers and sellers to arrive at the fair market value of the securities.

The capital market plays a vital role in the economy and helps companies and governments raise capital to finance their operations and growth. Understanding the key elements of the capital market is essential for investors, businesses, and policymakers alike. With stringent regulations, transparent transactions and fair market mechanisms, the capital market in India offers opportunities for investors to participate and benefit from a vast range of financial instruments.

Additional read: What are debt instruments

Additional read: What is Bridge Financing

Additional Read: Capital Budgeting

Types of Capital Market - Explained | Bajaj Finance (2024)

FAQs

Types of Capital Market - Explained | Bajaj Finance? ›

Capital markets refer to the platform where businesses and governments can raise funds by issuing and trading financial assets. There are two primary types of capital markets – debt market and equity market – that help businesses raise capital for their growth and development.

What are the 3 types of capital market? ›

The term capital market is a broad one that is used to describe the in-person and digital spaces in which various entities trade different types of financial instruments. These venues may include the stock market, the bond market, and the currency and foreign exchange (forex) markets.

What are the 4 types of financial markets money markets derivative markets and capital markets? ›

The 4 types of financial markets are currency markets, money markets, derivative markets, and capital markets. Capital markets are used to sell equities (stocks), debt securities. It is a place where different financial instruments are traded between different entities.

What are the two components of the capital market ______________? ›

Primary and Secondary

The capital market is roughly divided into a primary market and a secondary market.

What are the three types of financial markets What is financial capital? ›

Answer and Explanation: The types of markets for financial capital are the loans markets, bond markets, and stock markets. The firms can speculate in these markets for raising funds for fulfilling their capital requirements. Loan markets help the firms to get loans at an interest rate with a maturity period.

What is the types of capital market? ›

Capital market consists of two types i.e. Primary and Secondary.

What are the three 3 main parts in capital structure? ›

The Capital Structure is the mixture of debt, preferred stock, and common equity used by a company to fund its operations and purchase assets.

What are the 4 main financial markets? ›

The four main financial markets are the foreign exchange market, the fixed interest or bond market, the share or equity market and the derivatives market. financial sector – The sector of the economy that comprises financial institutions and financial markets.

What are the 2 most common types of financial markets? ›

The two main types of financial markets are Capital Markets and Money Market. The capital market is the market for medium and long term funds. You can read about the Financial Market – Functions, Features, Difference between Money and Capital Market in the given link.

What are the four important objectives of financial planning? ›

Determining your future needs in terms of investment, resources, funds. Determining the sources of funds. Managing or utilizing these funds efficiently. Identifying risks and issues in the plan.

What is the capital market in finance? ›

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.

What are the two types of equity capital markets? ›

It consists of the primary market for private placements, initial public offerings (IPOs), and warrants; and the secondary market, where existing shares are sold, as well as futures, options, and other listed securities are traded.

What are the two types of financial capital? ›

Debt and equity are the two most important forms of Financial Capital.

What are the different types of financial markets with example? ›

Multiple types of financial markets exist, including: Stock market - to buy and sell ownership shares of companies called stocks. Bond market - trades new and existing bonds, which are loans with stated terms. Money market - a market to trade short-term securities that are very liquid.

What is the structure of the capital market? ›

CAPITAL MARKET – STRUCTURE

Capital markets structure is made of primary and secondary markets. Secondary markets are places where the trade of already issued certificates between investors are overseen by regulatory bodies. Issuing companies play no part in the secondary market.

What is the best example of capital market? ›

What are examples of capital markets? The New York State Exchange, NASDAQ, London Stock Exchange, and the American Stock Exchange are some highly organized capital markets. NASDAQ offers electronic trading as opposed to the other capital markets.

What are the three functions of capital market? ›

Capital markets offer continuous availability of funds to finance companies, by linking companies, savers, and investors, facilitating transaction settlement, promoting saving habits, and channelling part of the savings into new and attractive investment opportunities.

What is a capital market example? ›

Some examples of capital markets are NASDAQ, BSE, New York Stock Exchange, London Stock Exchange.

What are the four main categories capital markets can be divided into? ›

Capital markets can be divided into four main categories: private equity, public equity, private debt, and public debt.

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