Chapter 3: Capital Markets and Investment Instruments

Structure and Function of Capital Markets

Capital markets act as platforms for raising and allocating long-term funds. The primary market deals with new securities through IPOs, while the secondary market enables trading among investors. These markets provide liquidity, price discovery, and wealth creation.

Capital markets form the backbone of any financial system by facilitating the flow of long-term funds between investors and institutions. They are organized platforms where individuals, corporations, and governments can raise money for long-term investments such as business expansion, infrastructure development, and innovation. Broadly, capital markets are divided into two segments - the primary market and the secondary market.

In the primary market, new securities such as shares, bonds, or debentures are issued for the first time. Companies use this channel to raise fresh capital directly from investors through mechanisms like Initial Public Offerings (IPOs) or private placements. This process helps businesses acquire the funds needed for expansion or modernization without incurring debt.

The secondary market, on the other hand, allows investors to trade already issued securities. Stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India, or the New York Stock Exchange (NYSE) globally, provide the framework for this trading activity. By enabling continuous buying and selling of securities, the secondary market ensures liquidity - allowing investors to convert their holdings into cash when needed.