Capital Market
Capital Market
What is a Capital Market?
Every company needs long-term as well as short-term capital. Long-term capital is required essentially for investment in fixed assets such as land, buildings, plant and machinery, vehicles, etc. It also includes core working capital and certain kinds of research and development, pre-operating expenses and preliminary expenses incidental to setting upa business, which are required to be deployed or incurred for the production or rendering of goods and services.
Short-term capital or working capital on the other hand, is required essentially for financing the requirements of the day-to-day operations of the business, such as raw materials, work-in-progress, finished goods, trade debtors, etc.
Capital market is thus a broad term, which includes primary markets, secondary markets, term lending institutions, long-term bonds and debenture markets, banks, investors, and almost anybody who is engaged in providing long-term capital (whether equity or debt capital) to the industrial sector.
A company cannot easily find investors for its securities (shares or debentures) from the public if they cannot subsequently trade these shares and debentures at will. In other words, a security cannot have a good primary market unless it has an active secondary market.
The primary market comprises companies who make security issues, and the general public who subscribeto them. The primary market is where a company, search of capital, makes its first contact with the general public. Therefore, if one is wondering whether or not to invest in the new issue of a company, one is basically contemplating whether or not to participate in the primary market.
The secondary market comprises buyers and sellers of shares and debentures subsequent to the original issue. For example, having subscribed to the share or debenture of a company, if one then wishes to sell this, it will be done in the secondary market. Similarly, one can also buy the share or debenture of a company from a secondary market (if the company is listed in the stock exchange), without having to wait for that company to come out with a new public issue. Thus, by their very role, stock exchanges are an important constituent of the capital market.
The two markets mentioned above are not two physically segregated institutions. Often the same partes may be involved in both the markets. Primary market merely alludes to the first purchase of a new share or debenture by the public directly from the issuing company, whereas secondary market refers to the subsequent trading in those shares and debentures. A stock exchange is the single most important institution in the secondary market for securities.