What is a Capital Market?

Capital market is a market for long-term debt and equity shares. The Debt Market is the market where fixed-income securities of various types and features are issued and traded. Debt Markets are, therefore, markets for fixed-income securities issued by the Central and State Governments, Municipal Corporations, banks, and financial institutions. A share may be bought or sold only once listed on the stock exchange.

The capital market is further divided into Primary Market and Secondary Market. The primary market is where securities are created, while the secondary market is where those securities are traded by investors. In the primary market, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO).

A rights issue is an offer to existing shareholders to purchase additional new shares directly from the company via the primary market. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.

The secondary market, also called the aftermarket and follow-on public offering, is the financial market in which previously issued financial instruments such as stocks, bonds, options, and futures are bought and sold. A secondary market transaction is when shareholders of a company sell their stock to another investor.

Stock Market is a type of Capital market in which securities are where listed (i) stocks,(ii) bonds, (iii) options and futures, and (iv)commodities are bought and sold.  The shares and stocks listed in a stock exchange are traded at a certain price for a specific stock based on demand and supply on a given day.

Involvement of Brokers and Dealers is required in the Secondary market of treasury bills. (Brokers and dealers both provide useful financial information about investments to their clients but differ in how they operate. Brokers help clients buy and sell securities while overseeing their brokerage accounts, while dealers are individuals or big financial firms that buy and sell securities for their accounts).

A Depository refers to a place or entity that holds financial securities in a dematerialized form. A bank, organization, or any institution holding and assisting in security trading is referred to as a depository. Depository accounts hold securities in the same way that bank accounts hold funds. Depositories hold securities in Demat form. There are two central depositories in India viz. CDSL (Central Depository Service India Ltd.) & NSDL (National Securities Depositories Ltd.).The depository participants maintain accounts with the above depositories who in turn maintain sub-accounts of their customers. When a trade occurs, a depository transfers the ownership of securities from the account of one investor to another.

Clearing House facility for netting of Payments and Security delivery is provided by Stock Exchanges.

The regulator of the Capital Market in India is the Security Exchange Board of India (SEBI). A bank requires registration with SEBI to become a banker to public/right issues, for the Collection of allotment/call monies, and for Payment of a company’s dividends/interest/refund orders.