What is capital market ?? What are objectives and function of capital market


An organised Capital Market is the basic requirement of industrial and commercial

development of a country. There is requirement of two types of credit in the economic system of a country i.e. short term credit and long-term credit. The short term credit is supplied by the Money market. On the other hand, the long term capital needs are met by the Capital market.Capital market is a central coordinating and directing technique helps in free and balanced flow of financial resources into the economic system operating in a country. The development of a good Capital market in a country is dependent upon the availability of savings, proper organisation of its constituent units and the entrepreneurship qualities of its people. The Capital market in India has substantially changed after Independence.

Meaning and definition of Capital market

Capital market is the centre for dealing in long term funds .In capital market money is borrowed and lent for a long period. It refers to the institutional arrangements for facilitating the borrowing and lending of long-term funds. The Capital Market consists of a series of channels through which the savings of public are made available for productive use to industrial and commercial enterprises and public authorities.

(1) "The Capital Market deals in long term funds both debt and equity".-H.F. Dougal

(2) "The term Capital Market is used for markets dealing in permanent, long period of medium termloans".

-G.H. Penters

Hence a Capital Market is a mechanism by which the borrowers obtain long-term

requirements and lenders are able to find outlets for their long term surplus invisible funds. In the Capital Market, the borrowers of money are Central, State and municipal local governments and private individuals etc. whereas, lenders are individuals investors, provident fund associations, stock exchanges, commercial banks, insurance companies etc. Therefore, Capital market deals in long term credit instruments,


Indian capital market got development alter the independence. Before independence Britishers applied the practices of London capital market in India. At that time corporate sector

as well as stock exchange sector was not so developed. Banking and other financial institution were not well-established in the country in those days, Indian capital market catch the speed after independence. Various banking and non-banking financial institution were established on the country of. Stock exchanges were also established for trading in the securities. After 1990,

Indian Capital market has witnessed significant growth. These financial and non-financial instructions are accelerating the growth process in the market significantly by facilitating various financial translations. Hence, Indian economy have well developed and diversified

capital market.



The Capital market plays a very important role in the industrial, commercial and overall development

The importance of Capital market in the process of economic development of a country can be described

1. Mobilisation of Savings : The capital market plays a very important role in mobilising the savings of people. Capital market mobilises the savings into productive channels for the development of trade, commerce and industry.

2. Stability in the Prices of Securities : Under well organised and developed capital market, the professionals in banking and non-banking financial intermediaries make valuable efforts to stabilise the prices of stocks, shares and securities.

3. Promote Economic Growth: The Capital market directly contributes to encourage the economic growth and development of country. The various institutions of the Capital market provide quantitative and qualitative guidance for the rational allocation of resources which leads to the development of commerce, trade and industry of the country.

4. Induces Capital Formation: The Capital Market induces capital formation of the

country. Savings are the backbone of the economic development of any country. In

under-developed countries like India, there is biggest problem of poverty which leads

to less savings, less capital formation and less economic development. The Capital

market induces the investors to invest their small savings in shares and debentures

which result in capital formation.


The major functions performed by a Capital market are as follow-

1.Mobilisation of Financial Resources : Savings is mainly done by a very large number of households in India. The Capital market encourages these savers to investment their savings into productive channels instead of wasteful channels i.e. real estates. The Capital market encourages the people to invest their saving in shares, debentures and other types of securities which leads to more output and higher rate of growth.

2.Induces Capital Formation : Indian Capital market induces capital formation. The shortage of capital is one of the main causes of India's underdevelopment. This

problem in economic development is rectified to some extent by the Capital market.

3. Supply of Working Capital : The Capital market provides necessary working capital for industrial and commercial development of India economy. The modern industrial

development involves advance technology which cannot start successfully without

adequate finance.

4. Increase in Income : The institutions and instruments of the Capital market assure safe and easy income to the savers. The investment in Unit Trust of India, government securities and debentures possess high quality of safety, liquidity and profitability.

5. Securing Foreign Capital : Another important function of Capital market is securing the foreign capital and know-how to fill up the deficit in the required resources for economic growth at a faster rate.

6. Effective Allocation of Resources : Effective allocation of the mobilised financial resources is also an important function performed by the capital market. The capital market helps economic growth through a better and more rational allocation of resources.