CAPITAL MARKETS | MODULE C | ABM EXAM PREPARATION
This post is about the Capital Markets, part of Module C of ABM Exam 2022 from IIBF prescribed CAIIB Syllabus.
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So, let us begin with our topic i.e. Capital Markets
So, what is a capital Market?
Is it something normal market or maybe a market that is in the capital of a city or country? No, a capital market is a place that enables the trading of financial instruments such as stocks, bonds, debt instruments, bonds, ETFs, etc. It is a source of funds for individuals, firms and governments.
The securities traded here would typically be a long-term investment with a lock-in period of more than a year. On the other hand, short-term investments are usually traded in the money market.
So, we will be getting answers of following questions:
- What are capital markets?
- How does the capital market work?
- What are the types of capital market?
- What are the Capital market elements?
- What are Functions of the capital market?
- Its Disadvantages
- about the FAQ
How does the capital market work?
The capital market helps the economy by providing a platform for raising funds for:
- business operations,
- development activities or/&
- wealth enhancement.
The functioning of the capital market is governed by the theory of the circular flow of money.
A firm needs money for business operations and usually borrows money from households or individuals. In the capital market, money from individual investors or households is invested in shares or bonds of a company. In return, investors receive profits as well as goods and services.
A market includes:
- suppliers and
- buyers of finance
- along with trading instruments and mechanisms.
- regulatory bodies.
Stock markets, stock markets, debt markets, options markets etc. are some examples of capital market.
What are the types of capital market?
One is Primary Market:
The primary market is intended for trading with newly issued securities, i.e. for trading for the first time. It allows for an initial public offering.
Here, companies raise funds through preferential allotments, rights issues, electronic IPOs or pre-selected securities issues or private placements. Typically, like an investment bank, the broker will attach an initial price to the stock. Once the sale takes place, the firms take their shares to the stock exchange to facilitate trading between different investors.
Other is Secondary Market:
Trading in old securities takes place in the secondary market, which occurs after a transaction in the primary market. Stock markets and over-the-counter trades fall under the secondary market. We also call this market the stock market or the spare parts market.
Examples of secondary markets are:
- London Stock Exchange,
- New York Stock Exchange,
- NASDAQ, etc.
What are the Capital market elements?
- Suppliers of funds: Important suppliers of funds in the market include individual investors, commercial banks, financial institutions, insurance companies, business corporations and pension funds.
- Investors – offer money with the intention of earning capital gains as their investment grows over time. In addition, they have benefits such as dividends, interest and ownership rights.
- Exchanges mainly operate the market. Other intermediaries include investment banks, venture capitalists and brokers.
- Regulatory authorities have the power to monitor and eliminate any illegal activities in the capital market. For example, the Securities and Exchange Commission overlooks stock exchange operations.
- Companies, entrepreneurs, governments, etc. are looking for funding. For example, the government issues debt instruments and deposits to finance the economy and development projects.
- Usually, long-term investments such as stocks, debt, government securities, bonds, debentures, etc. are traded here. In addition, there are also hybrid securities such as convertible bonds and preference shares.
Capital market and money market are one & same. The securities exchanged in the former would typically be a long-term investment with a lock-in period of more than a year. Short-term investments trade in money markets and include certificates of deposit, bills of exchange, treasury bills, etc.
What are Functions of the capital market?
- It mobilizes the parties’ savings from cash and other forms to the financial markets. It bridges the gap between people who supply capital and people who need money.
- To participants, exchange instruments have liquidity, that is, they can be converted into cash and cash equivalents.
- With higher risks, investors can get more profits. However, there are many products for those with low-risk appetites. In addition, there are certain tax benefits gained from investing in the stock market.
- Securities trading is also easier for investors and companies. It helps to minimize transaction costs as well as information costs.
- Every initiative requires cash. Financial markets are essential to national and economic development because they provide abundant sources of funds. For example, the World Bank works with global capital markets to mobilize funds to achieve its goals, such as poverty eradication.
- Usually, marketable securities can act as collateral for obtaining loans from banks and financial institutions.
Now, some of the Disadvantages of Capital Market:
- Investments in stocks and mutual funds are considered risky as the investments are highly volatile due to market fluctuations. Therefore, there is a huge chance of losing money due to market risks.
- Given the wide range of investment alternatives on the market, an investor may not make a fruitful choice without professional advice.
- Securities trading may involve brokerage fee, commission, etc., which increases transaction costs.
- Market fluctuations threaten own investments and prevent fixed income. Those who invest their hard-earned savings, such as retired workers and senior citizens, will prefer the safety of their funds to high earnings.
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