Role of Capital Market in an Economy
Financial market deals about the raising of finance by various institutions through the issue of various securities. Every business concern requires two types of finance. They are Short-term or working capital requirements and long-term or fixed capital requirements. The short-term or working capital requirements are raised or borrowed in the money market through the issue of different securities such as bills, promissory notes, etc.
Government raises the short-term funds through the issue of treasury bills. Banks play a vital role in providing short-term funds. The long-term funds or fixed capital are raised by companies by the issue of shares, debentures and bonds in the capital market. The long-term funds or fixed capital are raised by companies by the issue of shares, debentures and bonds in the capital market. Lets look at some of the importance of capital market in economy.
Importance of Capital Market
1. It is only with the help of capital market, long-term funds are raised by the business community.
2. It provides opportunity for the public to invest their savings in attractive securities which provide a higher return.
3. A well developed capital market is capable of attracting funds even from foreign country. Thus, foreign capital flows into the country through foreign investments.
4. Capital market provides an opportunity for the investing public to know the trend of different securities and the conditions prevailing in the economy.
5. It enables the country to achieve economic growth as capital formation is promoted through the capital market.
6. Existing companies, because of their performance will be able to expand their industries and also go in for diversification of business due to the capital market.
7. Capital market is the barometer of the economy by which you are able to study the economic conditions of the country and it enables the government to take suitable action.
8. Through the Press and different media, the public are informed about the prices of different securities. This enables the public to take necessary investment decisions.
9. Capital market provides opportunities for different institutions such as commercial banks, mutual funds, investment trust; etc., to earn a good return on the investing funds. They employ financial experts who are able to predict the changes in the market and accordingly undertake suitable portfolio investments.