Significance of Capital Market


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

Capital market / Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges along with a host of other intermediaries provide the necessary platform for trading in secondary market and also for clearing and settlement. The securities are traded, cleared and settled within the regulatory framework prescribed by the Exchanges and the Securities and Exchange Board of India (SEBI). With the increased application of information technology, the trading platform of the stock exchange is accessible from anywhere in the country through its trading terminals.
Capital market has a crucial significance to capital formation. For a speedy economic development adequate capital formation is necessary. The significance of capital market in economic development is explained below :-
Mobilisation Of Savings And Acceleration Of Capital Formation 
In capital  market various types of securities helps to mobilise savings from various sectors of population. The twin features of reasonable return and liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the capital formation in the country.
Raising Long - Term Capital 
The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The stock exchange resolves this dash of interests by offering an opportunity to investors to buy or sell their securities, while permanent capital with the company remains unaffected.
Promotion Of Industrial Growth 
The stock exchange is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels. Thus it stimulates industrial growth and economic development of the country by mobilising funds for investment in the corporate securities.
Ready And Continuous Market 
The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability makes investment in securities more liquid as compared to other assets.
Technical Assistance 
An important shortage faced by entrepreneurs in developing countries is technical assistance. By offering advisory services relating to preparation of feasibility reports, identifying growth potential and training entrepreneurs in project management, the financial intermediaries in capital market play an important role.
Reliable Guide To Performance 
The capital market serves as a reliable guide to the performance and financial position of corporates, and thereby promotes efficiency.
Proper Channelisation Of Funds 
The prevailing market price of a security and relative yield are the guiding factors for the people to channelise their funds in a particular company. This ensures effective utilisation of funds in the public interest.
Provision Of Variety Of Services 
The financial institutions functioning in the capital market provide a variety of services such as grant of long term and medium term loans to entrepreneurs, provision of underwriting facilities, assistance in promotion of companies, participation in equity capital, giving expert advice etc.
Development Of Backward Areas 
Capital Markets provide funds for projects in backward areas. This facilitates economic development of backward areas. Long term funds are also provided for development projects in backward and rural areas.
Foreign Capital 
Capital markets makes possible to generate foreign capital. Indian firms are able to generate capital funds from overseas markets by way of bonds and other securities. Government has liberalised Foreign Direct Investment (FDI) in the country. This not only brings in foreign capital but also foreign technology which is important for economic development of the country.
Easy Liquidity 
With the help of secondary market investors can sell off their holdings and convert them into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when they are in need of funds.
Revival Of Sick Units 
The Commercial and Financial Institutions provide timely financial assistance to viable sick units to overcome their industrial sickness. To help the weak units to overcome their financial industrial sickness banks and FIs may write off a part of their loan.


Friday, 02nd Oct 2015, 08:55:14 AM

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