Examine the working of the Capital Market along with its various Instruments and Intermediaries.

 Q. Examine the working of the Capital Market along with its various Instruments and Intermediaries.

Capital Market: Overview

The capital market is a financial system where individuals, companies, and governments raise long-term funds through financial instruments like stocks, bonds, and other securities. It plays a crucial role in economic development by facilitating efficient capital allocation. The capital market is broadly divided into two segments: Primary Market (where new securities are issued) and Secondary Market (where existing securities are traded).

Instruments of the Capital Market

1.    Equity Instruments (Shares/Stocks)

o   Common Shares: Represent ownership in a company with voting rights but no fixed dividends.

o   Preferred Shares: Provide fixed dividends but usually lack voting rights.

2.    Debt Instruments (Bonds & Debentures)

o   Corporate Bonds: Issued by companies to raise long-term funds.

o   Government Bonds: Issued by governments to finance public projects.

o   Debentures: Unsecured bonds backed by a company’s creditworthiness.

3.    Hybrid Instruments

o   Convertible Debentures: Can be converted into equity shares after a specific period.

o   Warrants: Give the holder the right to buy shares at a predetermined price.

4.    Derivatives

o   Futures and Options: Contracts that derive value from underlying assets like stocks or commodities.

o   Swaps: Agreements to exchange financial instruments, commonly used for risk management.


Intermediaries in the Capital Market

1.    Stock Exchanges

o   Platforms like the NYSE, NASDAQ, and NSE facilitate the buying and selling of securities.

2.    Regulatory Bodies

o   Securities and Exchange Commission (SEC) in the U.S.

o   Securities and Exchange Board of India (SEBI) in India.

3.    Investment Banks

o   Assist companies in raising capital by underwriting new securities.

4.    Brokerage Firms

o   Provide a trading platform for investors and charge commissions.

5.    Mutual Funds & Asset Management Companies

o   Pool investors’ money to invest in diversified portfolios.

6.    Credit Rating Agencies

o   Assess the financial health of companies and governments issuing bonds.

Conclusion

The capital market is a crucial pillar of the global economy, allowing companies to raise capital efficiently while providing investment opportunities for individuals and institutions. With various financial instruments and a network of intermediaries, it ensures liquidity, transparency, and growth in financial markets.

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