What Is The Role Of the Capital Market in Economic Development?
Capital Markets play a crucial role to keep the economy functioning and the economy would collapse without it. The most advanced economies have the most efficient capital markets.
So, how does the capital market work and why is it so important for the country's development?
Literally, the capital market is the kind of financial marketplace that facilitates the buy and sell of a wide range of long-term financial securities such as equity and debt along with short term funds such as treasury bills. The market where these securities are created is called the primary market and where already existing securities are traded is called a secondary market. Capital markets are the most important components and form a considerable proportion of the present-day economy.
Well-functioning markets ensure that both corporations and investors get or receive fair prices for their securities.
An effective financial sector is vital for economic growth in a modern new-age digitized economy. It pools together the domestic savings to mobilize and provide capital for productive growth-related projects and industries. In the absence of such a system, most industries would never be able to grow and would fail for want of funds and thus growth and development would be directly affected and impacted.
The basic channels connecting the economy to the capital market discussed in any Capital market course are thus also connected to the economic growth, growth, and development of industries or facilities and economic measures for funding such growth.
Such financing methods are:
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Direct financing: Here the agents facing a money deficit interact and deal with those agents with a monetary surplus without intermediaries.
In this method intermediaries function between the two agents and ensure the fund's needs are catered to. Such intermediaries could take the form of banks, insurance companies, investment funds, NBFCs, pension funds, and such. They not only provide funds but also securitize investments and purchase of assets in a major move to better capital demands.
Any capital market course should begin with answering questions related to what the Debt CM is. Most companies prefer to turn to DCM markets when they need funds for expansion but do not want to trade in their private ownership tag.
The DCM market is ideal since they deal with the sale of units called bonds. For the investors in bonds, this is a fixed-income investment where on redemption they get their money back along with attractive interest. The investment is low-risk and earns a fixed interest rate. Such funds are a short-term boon for firms needing funds for expansion without the dilution of ownership. It's a win-win deal for both.
The different types of bonds:
The bond types are risk-of-default related and can be categorized as
- The government bonds are at low risk for default.
- The companies that issued investment bonds are also fairly safe from default.
- The bonds that are high-yield are susceptible to risk and hence offer a better rate of returns.
The DCM also handles debt-equity issuances for several purposes. At times on reaching debt-maturity bonds are refinanced or reissued. At other times the expanding company may be looking to reduce cost-to-company capital.
Role of capital markets as economic growth drivers:
The capital market is an effective tool to drive economic development and growth.
The capital market effectively transfers monetary purchase power from surplus funds of investors to those with deficits for a fixed period in exchange for greater future purchasing power. They play a major role in recapitalizing and privatization of large infrastructure projects and industries. The privatization of banks, insurance companies, real-estate sectors, etc is a good example of this strategy.
The capital market channelizes and increases long-term savings to fulfil the monetary demands of companies with deficit funds to form long-term investments like pension funds, funeral expense covers, individual fixed investments, etc. This is especially useful for companies who wish to avail funds for a small price without going in for a change in ownership rights from private holding to equity holding etc.
Capital markets help provide equity for infrastructure development needs which tremendously impacts and provides for water and sewer systems, development of roads, energy, housing, telecommunications, socio-economic benefits provisions, public transport, and many more. Government bonds are the present means of financing such needs and provide the investors with low-risk appetites a guaranteed pay-back after the fixed term with an attractive interest rate.
Empowers the government strategy of social inclusion and economic growth by providing platforms and thrust areas wherein industries can compete globally, forge private-public partnerships, use capital efficiently, increase domestic productivity and spur growth, global integration, and better economic development.
The capital market mechanism provides for regulating the markets, covering risks according to appetites, ensuring good investor returns, and preventing the complete decay of stock market policies.
Importance of Capital Market for an Economy
It is only with the help of the capital market, that long-term funds can be raised by the business community.
Existing companies, because of their performance will be able to expand their industries and also go in for diversification of business due to the capital market.
Capital markets help individuals generate wealth and invest in their future. It provides an opportunity for the public to invest their savings in attractive securities which provide a higher return.
Also, the capital market provides an opportunity for the investing public to know the trend of different securities and the conditions prevailing in the economy.
The DCM and ECM offer various job roles in the banking sector for capital markets. The capital market course at Imarticus Learning is specially designed to help you hit the ground running.
It has modules for resume building, personality development, and interview facing techniques besides a robust financial Capital Market Tutorial curriculum. You will need classroom training, mentorship, certification, and experience to help you stand out from the many IB career aspirants. Enrol immediately at Imarticus today!