What is meant by Capital Market? Why is it considered as the most important source of raising finance?

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Accepted Answer

**Meaning of Capital Market:**

Capital market is a mechanism meant for the transfer of money capital from investors (savers) to entrepreneurs (borrowers) who need funds for setting up new enterprises, expanding, or diversifying their businesses. It is a financial market where long-term securities such as shares, debentures, and bonds are bought and sold. The capital market consists of both the primary market (where new securities are issued for the first time) and the secondary market (where existing securities are traded among investors).

**Why Capital Market is Considered the Most Important Source of Raising Finance:**

1. **Mobilizes Financial Resources on a Nationwide Scale:** Capital markets have the ability to pool savings from millions of individuals across the country and channel them into productive investments. This enables entrepreneurs to raise large amounts of capital that would not be possible through individual sources.

2. **Long-term Capital:** Capital markets provide long-term funds which are essential for setting up industries and enterprises. Unlike banks which primarily provide short-term finance, capital markets cater to the long-term financial needs of businesses.

3. **Secures Required Foreign Capital and Know-how:** Capital markets help in securing foreign capital and technology to promote economic growth at a faster rate. Foreign institutional investors can participate in the Indian capital market, bringing in both capital and expertise.

4. **Ensures Effective Allocation of Resources:** Capital markets ensure that mobilized financial resources are directed either to projects capable of the highest yield or to underdeveloped priority areas where there is an urgent need to promote balanced and diversified industrialization.

5. **Liquidity and Flexibility:** The secondary market provides liquidity to long-term securities, enabling investors to convert their investments into cash at any time. This encourages more people to invest in long-term securities.

6. **Price Discovery:** Capital markets facilitate the discovery of fair prices of securities based on demand and supply, which helps both issuers and investors make informed decisions.