JAIIB FREE NOTES ON CAPITAL MARKET, CHARACTERISTICS & FUNCTIONS

JAIIB FREE NOTES ON CAPITAL MARKET, CHARACTERISTICS & FUNCTIONS

This article will cover the topic of the capital market according to the prescribed syllabus of the PPB (principles and practices of Banking) paper of the upcoming JAIIB EXAM 2024. You will read about the meaning of capital market, the characteristics of the capital market, and the functions which are performed by the capital market forces in this article.

There are many other useful articles on PPB as well as all the papers of JAIIB EXAM 2024 i.e AFM, IE&IFS & RBWM.

We also provide study material for the 2024 JAIIB EXAM which is very helpful to clear the said EXAM. You can simply visit our Official Site for JAIIB 2024 STUDY MATERIAL

MEANING OF CAPITAL MARKET:

This is a financial market where long-term debt or long-term securities are sold and purchased. This debt or security usually has a maturity period = or > 1 year.

Capital market directs the wealth of the people who save money to those who can actually put it into useful productive use i.e. companies of governments who make long-term investments or do long-term capital spending.

Regulator or Watchdogs of financial markets such as SEBI (Securities and Exchange Board of India) is the entity that oversees the capital market in its jurisdiction or area so that it can protect the interest of investors against any fraud or dishonesty among other duties.

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DEFINITION OF CAPITAL MARKET:

It refers to the market where long term funds whether equity or debt are traded and funds are raised within or outside the country.

These markets help in economic growth by transferring Savings and directing them to the places where they can be used for productive activities. This use is facilitated by adopting the below-mentioned measures:

• It facilitates the issue of promiscuity in the primary market by way of directing the cash flows from a sector that has surplus money to the sector which has deficient money is surcharging government or corporate sectors.
• It also provides liquidity and a place to trade instruments of outstanding debt and equity.

FEATURES/CHARACTERISTICS OF CAPITAL MARKET:

Link between savers & investors:

An important link is provided between savers and investors through the capital markets. Here, the people who save money become the lenders of the points while the people who need money for investment purposes become the borrowers of the funds.

It must be noted there are people who have surplus money because they do not spend all their income. It is known as ‘ surplus units ‘.

The capital market acts as a mechanism of transmitting surplus funds to the units who have deficient funds as a lending.

Deals in Long Term fund:

One can avail funds for both long term and medium term uses from the capital market. It doesn’t deal with the funds which are available for < 1 year.

Utilizes Intermediaries:

There are different intermediaries which work in the capital markets such as brokers, depositories and underwriters etc. These intermediaries are actually the working organs of the capital market and play an important role in this field.

Capital formation:

The incentive to the people who save or provide surplus finance to deficit units is in the form of interest or dividend so that they can invest in various businesses. This is how capital formation is done.

Government Rules and Regulations:

Capital market is a free market but it has to follow the policies of the government as they fall under the framework of government rules and regulations. Example: Stock exchanges are overlooked by the government body, SEBI.

WHICH CAPITAL MARKET IS IDEAL?

Capital market is an ideal market if it has the following features:

• Finances are available at reasonable cost

• It helps in facilitating the economic growth of the country

• Operations are free, transparent, competitive and fair.

• Sufficient information is available to investors so that they can take informed decisions
• Allocation of capital is done in a way that it can produce maximum productivity

JAIIB SYLLABUS PRIORITY (VIDEO LINKS)

IMPORTANCE OR FUNCTIONS OF CAPITAL MARKET:

In any country, the capital market plays an important role by mobilising surplus funds for productive uses. This helps in the development of Industry and Commerce. This way they also have to send the capital formation and country’s economic growth.

Importance of capital market can be understood from the following discussion:

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Platform between savers and investors: 

The people who have surplus funds and the people who need funds find each other here. Surplus funds are usually provided by the person who has not spent their whole income and has saved some money that is lying idle with them. Investors or borrowers other people who actually need money either to make investments or to introduce more capital into the business.

Capital market provides a platform where both parties can find each other so that they can make deals and take benefit of the same by lending the money which is land surplus to those who are looking for money.

The basis for industrialization:

The capital market deals with long-term and short-term funds which are very much essential to establish industries. In this way, capital markets help in the industrialisation.

Accelerating the pace of growth:

When funds are available easily and smoothly whether for medium period or long period, it introduces the entrepreneurs to dive into the businesses or ventures with are looking profitable in the field of industry, trade or even agriculture. This is also the overall economic growth and increases the speed of economic development.

Generating liquidity:

Liquidity refers to the convertibility into cash. The shares of listed companies are freely Transferable. That is to say that if someone needs finance they can sell their shares in the stock market and can get cash in place of them. This is how liquidity is generated by the capital markets.

Increase the national income:

The funds which flow into the capital market from individuals for financial intermediaries get absorbed by the industry, commerce and government. Thus, facilitating the movement of capital to be used for more productive and profitable businesses, it increases the national income altogether.

Capital formation:

The incentive for making available the surplus funds to be people who actually need them is interest or dividend. This availability of surplus funds is helping in the formation of capital.

Productive investment:

It is basically a mechanism for people who have savings to lend it to the people who made those savings for whatever purposes (investments). This is the way of diverting the sources from lying idle (gold & jewelry) or wasting away to productive Investments.

Stabilization of the value of securities:

Capital market which is a well developed concept of export banking and non banking intermediaries who are able to bring stability in the stocks and securities value. It is done by providing capital to the person only in them at reasonable interest rates and it also helps in decreasing the activities which are only for speculation.

Encourages economic growth:

Economic growth is increased by capital markets. It helps in the flow of funds and helps in allocating them where they can be rationally used. This was achieved by converting the financial assets into productive physical assets which leads to the development of industrial commerce whether private sector or public sector and thus, encourages the economic growth in the country.

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