Capital Market Meaning with Recent Trends
Capital Market is generally understood as a market for long-term funds and investments in long-term instruments available in this market. However, now this market also includes short-term funds. Capital markets mean the market for all the financial instruments, short-term and long-term, as also commercial, industrial and government paper. The capital market deals with capital.
The capital market is a market where borrowing and lending of long-term funds take place. Capital markets deal in both, debt and equity. In these markets, productive capital is raised and made available to the corporate. The governments both central and state raise money in the capital market, through the issue of government securities.
Capital market refers to all the institutes and mechanisms of raising medium and long-term funds, through various instruments available like shares, debentures, bonds etc. With the pace of economic reforms followed in India, the importance of capital market has grown in the last ten years.
Corporate both in the private sector as well as in the public sector raise thousands of crores of rupees in these markets. The governments, through Reserve Bank of India, as well as financial institutes also raise a lot of money from these markets.
The capital market serves a very useful tool by pooling the savings of individuals and making them available to the business world. Well-developed markets augment resources by attracting and lending funds on a global scale. The global depository and American depository markets perform these functions for companies across the globe.
A well-developed capital market can solve the problem of paucity of funds for the business enterprises. The rapid growth of corporate entities has been made possible by the growth of these markets. This is a global phenomenon.
Constituents of the Capital Market
The capital market requires many intermediaries who are responsible to transfer funds from those who save to those who require these funds for investments. There are two important operations carried on in these markets.
- The raising of the new capital
- Trading in the securities already issued by the companies
The important constituents of the capital market are:
- The stock exchanges
- The investment trusts and companies
- Specialized financial institutions or development banks
- Mutual funds
- Post office savings banks
- Non-banking financial institutions
- International financial investors and institutions
The supply in this market come from savings from different sectors of the economy. These savings accrue from the following sources:
- Foreign countries
- Provident funds
- Financial institutions
All these entities contribute to savings in the economy. Part of these savings naturally flows in the capital markets. Individuals invest in these markets directly by investing in shares or debentures of companies, through bond issues of public sector units or through mutual funds. Corporates, who have more savings than their requirement for funds also, are participants in the market.
The story of Indian market has continued in 2005 and also in the first months of 2006. Last year FIIs have pumped in $ 10.2 billion. One of the most heartening features last year was the huge inflows in the equity mutual funds. These funds have given excellent returns over the past almost three years now and the retail investors are finding it more prudent to invest money through this route.free investment in ELSS scheme up to Rs. 1 lakh is now eligible for deduction under Section 80 C of the Income Tax Act During the year (2006) there is going to be a flood of IPOs in the markets.
Some reports suggest that the total amount that is likely to be raised could be in excess of Rs. 60,000 crores. Prominent among them could be Reliance Petroleum, Reliance Infocom, Hutch, Idea, and others. There is a talk that SBI will hit the markets during this year.
The clause 49 of listing agreement has become applicable from 1st January 06. It is hoped that this will be a major step in the implementation of corporate governance practices in India. The SENSEX is climbing to new heights every month. In March it has crossed the level of 10800 which is an all-time record. Many are already talking about the figure of 12000 by the time corporate India unveils its results for FY 05-06. Everybody seems to be upbeat about the markets at this stage.
However, it will be prudent to tone down the expectations. After all, whatever goes up must come down sometime tie market PE is around 18.5 right now and the market capitalization is around Rs. 25 lakh crores and rising One must also remember that the Indian economy is one of the fastest growing economies in the world. In past three years, the economy has grown between 7 & 8% per annum.
According to the Asian Development Bank, the economy is likely to grow by 8% for the next five years or more. The government on the other hand wants to push up the rate to 10% per annum. If this is what is going to happen, the markets will attract more investments from abroad as well and then what is going up may keep going up!
The Indian markets saw the Sensex rising to the levels of 12,600 in May. However, as was expected a correction seems to have taken place. The Sensex lost heavily and went below the psychological level of 10000 before it started going up again. The FM sold heavily during the down phase of the Sensex. They seem to have sold shares worth $ 2.5 billions.
But we in India need to get used to all this, because the FIIs will sell when the markets are giving them good returns and will start buying again when the markets correct themselves. This behavior is normal because they have to book profits so that they give good returns to those who invest money with them.
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