Union Budget 2019: Capital markets provide platform for investors and businesses to fulfil their financial needs

Simply put, capital markets provide medium to long-term funds to buyers and sellers. This is in contrast with the money market which deals with short-term funds. In the capital market, buyers and sellers trade in instruments like bonds, debentures and stocks. Individuals as well as institutions trade in these medium and long-term instruments in the capital markets.

Capital markets is a platform where investors, willing to channelise their funds, meet entities, which seek much-needed funding for growing their business. Retail and institutional investors have the funds while businesses, governments, and people seek them.

Capital markets are split into two parts: Primary markets and secondary markets. While primary markets facilitate trade of new stocks and other securities, secondary market deals with the exchange of existing or previously-issued securities.

Capital market can also be divided in terms of the instruments being traded: Stock market or Bond market. While bond markets deal with long and medium-term bonds issued by corporates and government, stock markets deal with equity shares issued by publicly listed companies.

 Union Budget 2019: Capital markets provide platform for investors and businesses to fulfil their financial needs

Representational image. Reuters.

Two types of bonds are available in the Bond market: Corporate bonds and government bonds. Corporate bonds are further classified into convertible and non-convertible bonds. Convertible bonds can be converted into a pre-defined number of stocks as and when required by the investor. Non-convertible bonds, as the name suggests, are plain bonds.

Generally, those who are averse to taking risks in the financial markets tend to buy bonds, which give steady returns and do not have much risks.

In India, the government bond market is bigger than the corporate bond market. Government bonds, known as G-Sec, help the government to finance their activities. G-Secs are considered risk-free as the investors deal with the government itself. With the maturity period of 3 months to 30 years, these securities give a healthy and risk-free return to investors.

Stock markets, on the other hand, are likely to provide a much higher return to an investor than bond markets. However, with higher returns also looms the threat of uncertainty in stock markets. Most of the stock trading in India happens in two major exchanges—the Bombay Stock Exchange, Asia’s oldest stock exchange, and the National Stock Exchange. There are more than 5000 firms listed on the BSE, while NSE has over 1,600 companies on its list.

However, out of the 5,000 listed on its list, 500 companies make up 90 percent of BSE’s market capitalisation. On the other hand, NSE has a near dominance in derivatives trading—a form of trading where securities are backed by an underlying asset or group of assets. Nevertheless, compared to the population size of India, only about two percent of the population has investments in stock markets.

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Updated Date: Jun 25, 2019 16:22:16 IST