Capital Markets - Importance, Features and Structure For UPSC Economics (2024)

Capital Market is a place where different financial instruments are traded between different entities. On one side, there are entities that have abundant capital, much more than they require and on the other side, there are entities who need capital for various purposes.

Capital markets are used to sell equities (stocks), debt securities.For more information on UPSC Exam, visit the given link –IAS Exam. You can also watch a video that further explains the concept of capital markets at the end of this article.

TheIAS Topperpage will help you gain some insights on the tips and strategies needed to crack the exam!! Visit the page now!!

Refer to the following links below to strengthen your UPSC Exam preparation:

  • Stay updated with Current Affairs.
  • Yojana Magazine – Banking Reforms (January 2018 Gist).
  • Download NCERT Notes for UPSC PDF (Free)
  • Download UPSC Indian Economy Notes PDF (Free).
  • Take the CSAT Mock Tests
  • GS 1 Structure, Syllabus and Strategy for UPSC
  • GS 2 Structure, Syllabus and Strategy for UPSC
  • GS 3 Structure, Syllabus and Strategy for UPSC
  • GS 4 Structure, Syllabus and Strategy for UPSC
  • Previous Years Economics Questions for UPSC Prelims
  • Download UPSC Notes PDF (Free)

Capital Markets – UPSC Notes:- Download PDF Here

What are Capital Markets?

Capital markets are venues where savings and investments are channeled between the suppliers who have capital and those who are in need of capital. The entities that have capital include retail and institutional investors while those who seek capital are businesses, governments, and people.

Capital markets seek to improve transactional efficiencies. These markets bring those who hold capital and those seeking capital together and provide a place where entities can exchange securities.

Capital Markets – Types

Capital markets are mainly divided into 2 different types.

  1. Primary Markets:The primary market is the part of the capital market that deals with the issuance and sale of securities to investors directly by the issuer. An investor buys securities that were never traded before. Primary markets create long term instruments through which corporate entities raise funds from the capital market.
  2. Secondary Markets:The secondary market, also called the aftermarket and follow on public offering is the financial market in which previously issued financial instruments such as stock and bonds are bought and sold

Capital Market – Examples

Examples of capital markets are given below.

  1. Stock Market:A stock market, equity market or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses
  2. Bond Market:The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities
  3. Currency and Foreign Exchange Markets:The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates for every currency.

Which are the most common capital markets?

Stock market and Bond market are considered as the most common capital markets.

Why do we need the capital market?

Capital market is a cog in the wheel of the modern economy since capital markets move money from the entities that have money to the entities that require money for productive use.

Capital Market – Features

In capital markets, there are 2 entities, one who supplies capital and the other entity is the one who needs capital.

Usually, entities with surplus capital in the capital markets are retail and institutional investors. Entities seeking capital are people, governments and businesses.

Some common examples of suppliers of capital are

  1. Pension funds:A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income
  2. Life insurance companies:Life insurance companies offer contracts between an insurance policyholder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policyholder). The Insurance Development and Regulatory Authority of India manage everything related to insurance in India.
  3. Non-financial companies: Non-financial companies are those businesses which don’t accept deposits or make loans. Examples of non-financial companies are Healthcare, Technology, Industrial, sector related companies.
  4. Charitable foundations:A charitable foundation is a category of a nonprofit organization that will typically provide funding and support for other charitable organizations through grants.

Some common examples of users of capital

  1. People looking to purchase vehicles, homes
  2. Governments
  3. Non-financial companies.

Capital Market – Structure

Capital markets structure is made of primary and secondary markets.

Primary markets consist of companies that issue securities and investors who purchase those securities directly from the issuing company. These securities are called Initial Public Offerings (IPO). Whenever a company goes public it sells its stocks and bonds to large scales institutional investors like hedge funds and mutual funds.

Secondary markets are places where the trade of already issued certificates between investors are overseen by regulatory bodies. Issuing companies play no part in the secondary market. Examples of secondary markets are New York Stock Exchange (NYSE), London Stock Exchange (LSE), Bombay Stock Exchange (BSE).

To know more about the Major Stock Exchanges in India, visit the linked article.

Capital Markets – Functions

  1. Capital markets bring together those requiring capital and those having excess capital.
  2. Capital markets aim to achieve better efficiency in transactions.
  3. It helps in economic growth
  4. It ensures there is the continuous availability of funds
  5. By ensuring the movement and productive utilisation of capital, it helps in boosting the national income.
  6. Minimizes transaction costs and information costs.
  7. Makes trading of securities easier for companies and investors.
  8. It offers insurance against market risk.

Capital market – Advantages

  1. Money moves between people who need capital and who have the capital.
  2. There is more efficiency in the transactions.
  3. Securities like shares help in earning dividend income.
  4. With the passage of time, the growth in value of investments is high.
  5. The interest rates provided by securities like Bonds are higher than interest rates given by banks.
  6. Can avail tax benefits by investing in stock markets.
  7. Scope for a wide range of investments.
  8. Securities of capital markets can be used as collateral for getting loans from banks.

Frequently asked Questions Related to Capital Markets


Are Capital Markets same as Financial Markets?

While there is a great deal of overlap at times, there are some fundamental distinctions between these two terms. Financial markets encompass the broad range of venues where people and organizations exchange assets, securities, and contracts with one another, and are often secondary markets. Capital markets, on the other hand, are used primarily to raise funding, usually for a firm, to be used in operations or for growth.


What is an example of a capital market?

A capital market is intended to be for the issuance and trading of long-term securities. Examples of highly organized capital markets are the New York Stock Exchange, American Stock Exchange, London Stock Exchange, and NASDAQ. Securities can also be traded “over the counter,” rather than on an organized exchange.

For more such related links and articles, candidates can click on the links below.

Related Links

NCERT BooksUPSC Exam PatternCurrent Affairs Quiz
Core SectorCensus of India 2011UPSC Mains Syllabus in Hindi
Asia Pacific GroupUN OrgansNRC Registration

Click on the video link below in order to gain a better understanding of capital markets.

Video Lecture on Capital Market

Capital Markets - Importance, Features and Structure For UPSC Economics (1)

Capital Markets - Importance, Features and Structure For UPSC Economics (2024)


Capital Markets - Importance, Features and Structure For UPSC Economics? ›

Capital markets serve as the conduit for the flow of savings and investments between suppliers who have capital and those who are in need of capital. The suppliers of capital include retail and institutional investors, while the seekers of capital are businesses, governments, and individuals.

What are the features and importance of capital markets? ›

Capital market is a market for long-term funds-both equity and debt-and funds raised within and outside the country. The capital market aids economic growth by mobilizing the savings and directing the same towards productive use.

What is the structure of capital market upsc? ›

Capital markets structure is made of primary and secondary markets. Primary markets consist of companies that issue securities and investors who purchase those securities directly from the issuing company. These securities are called Initial Public Offerings (IPO).

What is the role and structure of the money and capital market? ›

The money market is the trade in short-term debt. It is a constant flow of cash between governments, corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight and no longer than a year. The capital market encompasses the trade in both stocks and bonds.

Which function of capital market is most important? ›

Providing Liquidity is a vital function of capital markets, where they offer investors the ability to quickly buy or sell securities with ease. This liquidity means investors can convert their investments into cash rapidly, without significantly affecting the price of the asset.

What are important features of capital economics? ›

Characteristics of Capital in Economics

Man-made: Capital refers to things that are man-made and controlled by humans while being used in the production of other goods and services. This includes both tangible (e.g., factories, machines) and intangible assets (e.g., intellectual property, technological innovations).

What is the importance of capital market in economic growth? ›

Capital markets are vital for India's economy because they provide a platform for mobilizing and allocating funds for productive activities. Capital markets facilitate the flow of savings from investors to entrepreneurs, who use them to finance their projects and create jobs, income, and growth.

What are the 4 types of capital structure? ›

The types of capital structure are equity share capital, debt, preference share capital, and vendor finance. In addition, it ensures accurate funds utilization for business. The right capital structure level decreases the overall capital cost to the highest level. Also, it increases the public entity's valuation.

What is capital structure in capital market? ›

Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth. Equity capital arises from ownership shares in a company and claims to its future cash flows and profits.

What is the structure of Indian capital market introduction? ›

Capital markets structure is made of primary and secondary markets. Secondary markets are places where the trade of already issued certificates between investors are overseen by regulatory bodies. Issuing companies play no part in the secondary market.

What is the role of capital structure? ›

Importance of Capital Structure

A good capital structure ensures that the available funds are used effectively. It prevents over or under capitalisation. It helps the company in increasing its profits in the form of higher returns to stakeholders.

What is the structure and importance of the money market? ›

The money market is a crucial financial market segment where short-term borrowing and lending of funds occur. It facilitates the smooth functioning of the economy by providing a platform for participants to meet their immediate cash needs and manage liquidity.

Who controls the capital market in India? ›

10 The Securities and Exchange Board of India (SEBI) is the regulatory authority for the capital market, but private placements are currently not regulated by SEBI.

What are the features of the capital market? ›

Features of the capital market are as follows: It facilitates long-term funding through securities like stocks and bonds. The returns on investments are on the higher end. It has diverse investment options and government participation.

What is the capital market in UPSC? ›

The capital market in India encompasses the market for funds with a maturity of one year and above, commonly referred to as term funds. This market facilitates the flow of medium and long-term funds, catering to the needs of both the government and the private sector.

What is the primary purpose of the capital markets? ›

Capital markets allow traders to buy and sell stocks and bonds, and enable businesses to raise financial capital to grow. Businesses also have reduced risk and expenses in acquiring financial capital because they have reliable markets where they can obtain funding.

Why is the market capital important? ›

Importance of Market Capitalization

It aids investors in assessing risk, comparing companies, and identifying market trends. Additionally, it impacts stock liquidity, index composition, and financial decision-making, making it an essential metric in finance.

What are the features of money market and capital market? ›

Money market is for short-term liquidity, while the capital market is for long-term investments. Money market instruments are highly liquid but less risky compared to capital market instruments. Key differences include duration, liquidity, risk, and participants.

What is important of capital? ›

It increases the productivity of employees and in turn, the economy as a whole. Importance to technology and specialisation alongside a growing population has left manufacturers to arrange for more capital and allied resources to fulfil the demands. Capital accumulation is said to be the core of economic development.

Why are capital markets and efficient markets important? ›

The well functioning of the capital market is vital in the contemporary economy in order to be able to perform an efficient transfer of money resources from those who save towards those who need capital and those who succeed to offer it a higher capitalization; the capital market can significantly influence the quality ...


Top Articles
Latest Posts
Article information

Author: Lilliana Bartoletti

Last Updated:

Views: 5651

Rating: 4.2 / 5 (53 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Lilliana Bartoletti

Birthday: 1999-11-18

Address: 58866 Tricia Spurs, North Melvinberg, HI 91346-3774

Phone: +50616620367928

Job: Real-Estate Liaison

Hobby: Graffiti, Astronomy, Handball, Magic, Origami, Fashion, Foreign language learning

Introduction: My name is Lilliana Bartoletti, I am a adventurous, pleasant, shiny, beautiful, handsome, zealous, tasty person who loves writing and wants to share my knowledge and understanding with you.