The capital market is classified into two categories (Components), namely,
(i) Primary market or new issue market, and
(ii) Secondary market or stock exchange.
Functions and Importance of Capital Market:
(a) Availability of funds: Capital market helps to raise long term funds from both domestic and as well as foreign institutional investors.
(b) Mobilization of savings: Capital market mobilizes the savings of individuals and institutions to productive channels. It facilitates flow of long term capital from those who have surplus capital to those who need capital.
(c) Industrial growth: it plays a significant role in the economic development of a country. It facilitates increase in production and productivity in the economy and hence enhances the economic welfare of the society.
(d) Stability in security prices: The Capital market tends to stabilize the values of stocks and securities and reduce the fluctuations in the price to the minimum. The process of stabilization is facilitated by providing capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities.
(e) Liquidity: It provides liquidity to investors in capital market. The securities issued through the primary market are traded in the secondary market which provides liquidity to the investors and also short-term as well as long-term yields on their investments.
(f) Promotion of economic growth: The capital market not only reflects the general conditions of the economy, but also smoothens and accelerates the process of economic growth. Various institutions of the capital market allocate the resources rationally in accordance with the development needs of the country.
(g) Balance between demand and supply: It bring about balance between demand and supply of capital by creating a link between those who demand capital and those who supply capital.
(h) Attracting foreign capital: Capital market helps in attracting foreign investments. The Indian capital market provides the channel through which foreign institutional investors and NRIs ca invest their funds in the securities of Indian companies.
