Capital Market: Definition, Functions & Advantages

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What is Capital Market?

The capital market is a financial market for trading in, long-term financial assets. It is a market for long-term loans and investments. It consists of people and organizations who wish to lend out money or to borrow on a long-term basis.

Financial institutions which operate in the capital market include: Development Banks, Insurance Companies, Investment Banks, Mortgage Banks, the Stock Exchange etc.

Instruments used in the capital market for transferring money include shares, development stocks or government bonds, and company bonds.

Functions and Advantages of the Capital Market

  • Capital market aids mobilization of savings.
  • Capital market encourages the growth of merchant banks.
  • Capital market provides an opportunity for the general public to participate in the running of the economy.
  • Capital market provides long-term capital to the public and the private sector investments.
  • Capital market provides managerial, technical and financial advice to investors.
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Difference Between Capital Market and Stock Exchange

While the Capital Market is a market for long-term loanable funds, the Stock Exchange, on the other hand, is an organized market for the exchange of existing securities. i.e. claims to loans or shares.

Capital Market: Definition, Functions & Advantages
Capital Market

Institutions Involved in the Capital Markets

The Central Bank: The central bank involves in both the money and capital markets as lender of the last resort.

Development Banks: These banks were established in order to facilitate the development of a nation. They offer long-term loans for development projects.

Building Societies: They are financial institutions that receive deposits from members of the public on interest basis and offer long-term loans to depositors to enable them purchase or build their own houses. Empty land owners with the required securities are offered loans by these building societies in order to enable them develop the land. If they give out loans to people to enable them purchase houses, the particulars of the houses concerned will be kept with them (building societies) to avoid default in repaying the loans. These societies also encourage people to save money by basing the amount they will give as loan on the amount saved by the customer.

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National Provident Fund: This is a financial institution that accepts deposits from workers and makes it available to them when they retire from active service. The bulk of money it saves and gives to workers enables them to establish their own business. The money contributed by workers to this financial institutions as savings is made availabie to capital market in form of long term-loans of which the greater part goes to the government.

Insurance Companies: These are financial institutions that are involved in both money and capital markets. They make the money they collected from their clients as premium available to the capital market. For instance, the money people pay as premium for life assurance that stays for a very long period with them is given out to members of the public as Iong-term loans for capital projects.

The Stock Exchange: A stock exchange may be defined as a market where shares, stocks and other securities are sold and bought. Before stucks and shares which come from registered limited liability companies are sold and bought, they must be approved by the Securities and Exchange Commission which is the governing body of the Stock Exchange market.

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Both existing and new stocks and shares are sold and bought in stock exchange markets. These securities are sold and bought through agents known as brokers and jobbers who earn commission for the services rendered.