Capital market Concept Explained [BCS 4/15] Eng.

Financial markets are classified into two parts – money market and capital market. In this article, we will discuss capital market in a simple and easy way and understand its various important aspects.

Note – If you want to understand the basics of share market from zero level then you should start with Part 1. – Share Market and Related

| Financial market and its classification

There are two types of people in any economy , those who have surplus money, and those who need money so that they can create different types of resources. The market which helps these two groups in bringing on the platform and carrying out the transactions between them is called financial market .

Financial market is mainly classified into two parts – 1. Money Market 2. Capital Market . This article is on money market.

In the previous article, we understood the money market as one of the two parts of the financial market. In which we saw that the money market is related to the short-term capital system. 

That is, for a period of less than 1 year, the capital needs are met by the money market. But longer than that requires capital markets. Let us understand this because this is the part which is directly related to the share market.

| What is capital market? 

The part of the financial market where long-term financial needs are met is called the capital market. Here long term refers to a period of more than 1 year. Because raising capital for a period of less than 1 year is the job of money market.

In other words, a financial market where debt or equity backed securities are bought and sold for a period of one year or more, is called a capital market, such as a stock exchange, commercial bank etc., it is a capital market.

Note – Debt means loan or borrowing, it will be understood in further detail and Equity backed securities means such security in which there is any kind of stake.

| What is the difference between Shares and Equity?

The question may come in your mind that equity also means share and share also means share. Then why are both written separately? What is the difference between the two?

Actually both mean share only, that’s why both are used interchangeably. However, depending on the experiment, the difference becomes clear. 

For example, you bought a TV on EMI and you have paid 10 percent of its value. This means that you have 10 percent equity of that TV. 

Here the word share is not used because you have not bought the share of the TV but have bought the ownership of the entire TV. 

On the whole, equity constitutes a large part while shares constitute a small part of it. [Read the difference between Shares and Equity to know in detail ]

Q. Bank loans can also be taken for long term, then what is the point of raising money from the market by selling bonds or shares?

Actually, there is no such thing in bank loan that is in shares or bonds, the main reason for this is that you cannot buy and sell bank loans in the market like shares and bonds, there is no such thing as stake in it and Its regulation is also a bit strict. That’s why it becomes a separate system.

Characteristics of Capital Markets – Capital markets bring together those who hold capital and those who demand capital together as well as provide a place where such people can exchange securities .

People come to the capital market because there is a lot of return here, but at the same time it is also important to keep in mind that the risk is also high here.

| Components of Capital Market

There are mainly three components of capital market. 1. Insurance , 2. Mutual Fund and 3. Securities or Stock Market .

Talking about insurance , it is a component of the capital market in which a company or government provides a guarantee of compensation for certain losses such as damage, illness or death in return for the payment of a certain premium. [There is a separate article on this, read it for better understanding.]

Talking about Mutual Fund, it is a fund that is created when a large number of investors invest their money in it and all that money is invested by a management company in shares, bonds or other securities.

The profit that comes from this is distributed among all the investors in the same ratio in which those people invested money. [There is a separate article on this, read it for better understanding.]

The thing that we are going to discuss right now is its third component i.e. securities or stock market . 

| What is Security?

Any financial instrument that has monetary value is called a security. Such as shares, bonds, etc. The market in which this share or bond is bought and sold is called securities market or stock market .

There are two types of securities market – primary market and secondary market .

Whenever a company or government issues shares or bonds for the first time and investors buy them, it is called primary market. 

At the same time, after coming in the market, when people start buying and selling the same stock or bond in the market, then it is called secondary market.

We will further understand this concept in detail in the securities market. One thing to remember here is that the stock market is also called the securities market. This is because a share is also a security.

That is what the capital market is all about ; for Many of its components and terms, link is given in place, to connect things, read that too. Must read next article Securities as it will help in understanding how the stock market works.

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| Share Market Basic Concept Series (BCS)