All You Need to Know About the Instruments in Capital Markets

The Indian Capital Markets provide a platform to people for trading and investing in different financial securities like bonds, stocks, debentures, etc. Capital Markets are also used for raising public funds for various operations by companies and organizations. There are various types of investors and buyers as well in the financial markets including institutional buyers, individual buyers and corporate entities. The financial markets form a very important aspect of the Indian economy.

Capital markets are different from Money market, which deals with liquid financial instruments. Capital markets also deal with money, but indirectly. However, both are financial markets, and the only difference between capital markets and money markets is the type of assets each one of them deals in. For instance, capital markets usually deal in long term assets, whereas money markets usually involve short term assets.

Let us discuss about the basics of capital markets and the types of instruments available in them. We will also discuss about the functions of capital market.

Instruments in the Indian Capital Market

1. What is Capital Market?
2. Instruments in Capital Market
   1. Equity Security
   2. Debt Security
3. Functions of Capital Market

So, without further ado, let us discuss about each one of these in detail and help you have a glimpse at the world of Capital Markets in India.

1. What is Capital Market?

Capital Market is the platform where traders, i.e. buyers and sellers trade in long term assets and securities. These securities include stock, bonds etc. and are not limited to individual buyers. The Capital Markets include institutional buyers and corporate entities as well.

Capital Markets help in the movement and transfer of fund from those who have a surplus amount with them to those who need the same. These funds are sourced through public offerings, and are often utilized in upscaling the operations, paying off debts and other productive areas.

These securities are long term assets, which mean that they are likely to remain with the buyer or investor for a year at least.

2. Instruments in Capital Markets:

Capital Markets consists of two main categories of investment instruments. These include:

1. Equity Securities

• a. Equity Shares:
• For any public limited or joint stock Company, equity shares are the prime source of finance. You can buy these shares and exercise your right to vote by doing so. You will also benefit from dividends when the company makes profits. In short, holding shares of a company means that you will be a part owner of the company.
• b. Preference Shares:
• For a public limited company, preference shares are the secondary source of finance. As the name suggests, preferential share holders enjoy exclusive privileges by the company including priority payout of dividends before equity shareholders. However, preferential shareholders do not have a voting right typically.

2. Debt Securities:

• a. Bonds:
• These are fixed income instruments which are mainly issued by state governments, sovereign governments, municipalities and even large-scale companies for raising capital for financing infrastructural development and other types of projects. Bond can be considered as a loaning instrument and the issuer of bond is referred to as the borrower. Bonds carry a fixed lock in period and therefore bond issuers are mandated to repay the principal amount to bondholders on maturity date. Bond holders are also entitled to periodic interest payments.
• b. Debentures:
• These are entirely different from bonds because debentures are unsecured investment option, because they are not backed by any collateral or asset. The lending in case of debentures is based entirely on mutual trust and the investors act as the potential creditors of the company or issuing institution.

These are the main instruments which are available in the capital markets. Each of these instruments is unique and has distinguishing features which are beneficial for the investors and companies both.

3. Functions of Capital Market:

Capital Market may have different types, but the function of all of them is similar. Let us discuss about some of the key functions of capital markets.

• I. They enhance the trade of securities.
• II. They provide a common platform to savers and investors both.
• III. Fund raising for companies which require them.
• IV. Stimulation of economic growth.
• V. Improvement in the process of allocation of capital.
• VI. Reduction in information and transaction charges significantly.
• VII. Speedy valuation of securities.
• VIII. Channeling of funds for productive utilization.

Thus, the capital markets provide an effective medium for mobilizing funds from investors and sellers. Considering the above listed functions, it is evident that the capital markets are not only a platform for transferring funds but also has long term prospects.

Capital Markets help to enhance the overall economic growth of the nation by boosting national income. There are two types of capital markets in India, namely Primary market and Secondary Market.

Conclusion

The Indian Capital Markets are one of the most sought-after platforms for investment and trading. However, they come with their own set of risks. Therefore, it is very important to have an idea about your risk bearing capacity before entering this lucrative world. A risk profile analysis from a SEBI registered investment advisor can help you with the same. Also, it requires lot of knowledge and expertise in the financial markets. If you are new to the Capital Markets, it is better to take the help of a certified investment advisor who can help you by providing you research based recommendations for trading and investing in the markets.