The modern-day financial system is established on twin pillars, the first one is called the capital market and the second one is known as the money market. Both the markets work in conjunction to provide a stable financial system in the country. One alone is inadequate and inefficient to fulfill the growing demands of the dynamic economy in the era of globalization and financial innovations.
The major difference between these two is the duration of the financial instruments involved. The money market serves the purpose of short term borrowing and lending, the instruments traded have a maturity of one year or less usually. The capital market, on the other hand, deals with instruments having long term duration, usually long term securities which have a significant influence on the capital.
Having in-depth knowledge about the structure of the Indian Capital Market will add a lot to your Capital Market training programs. Let’s dive deeper into what exactly is the capital market and what kinds of securities are traded using the capital market.
Understanding the Indian capital market
The capital market is that branch within the financial system that deals with long-term securities and facilitates the trading of the same. The securities commonly traded in this market comprise of stocks bonds etc. The trading process takes place electronically with the help of an exchange platform using intermediaries like financial brokers who guides and navigates through the requirements of the stock exchanges.
The capital market is further classified into two categories, the primary capital market, and the secondary capital market. The primary capital market deals with securities that are issued for the first time in the market like the Initial Public Offerings (IPOs) from companies going public. Debt and the right issues from companies are also facilitated in the primary market.
In the secondary market, investors buy and sell the shares or other securities among themselves and the company that issued the same is not directly involved. The amount received from the sale of securities in the primary market is added to the company’s capital or income but the sale and purchase of securities in the secondary market are beneficial to the investors. Broadly the secondary market has two categories the secondary market for corporate and financial intermediaries & for public sector bonds and government securities.
The financial instruments mainly traded in the Indian capital market include equities, derivatives, and debt instruments. The equity market instruments comprise of common stocks, exchange-traded funds, IPOs, etc. Derivatives include futures contract, put option and call option. Currency derivatives and NSE bond futures are some of the other prominent derivate instruments. The debt instruments include government-backed securities and corporate bonds.
All the financial transactions in the capital market are done through the medium of exchange. An exchange can be understood as a platform that provides a medium to buy and sell shares electronically, other services include facilitating issue and redemption of securities. At present, there are 23 SEBI approved stock exchanges in the country, the Bombay Stock Exchange (BSE) & National Stock Exchange (NSE) are the two biggest stock exchanges in India.
Now the day the functioning of the capital market is very cumbersome and needs a body to regulate and oversee its conduct to maintain standard ethical practices in the industry. The body that regulates the capital market in India is known as the Security and Exchange Board of India (SEBI), established in 1988 by the government of India.
Some of the significant functions carried out by SEBI include monitoring and regulating the securities market of India and protecting the interest of the investors by curbing out mal-practices and setting laws and regulations that act as legal guidelines for the industry.