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.

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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

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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)


What is capital market and features of capital market? ›

Features of the capital market are as follows: Capital market is a market where mid and long term securities are traded. It offers higher returns on investment. Capital markets are not highly liquid in nature. Individuals and institutions both participate in the capital market for trading in securities.

What is the importance of capital markets? ›

Capital markets are used primarily to sell financial products such as equities and debt securities. Equities are stocks, which are ownership shares in a company. Debt securities, such as bonds, are interest-bearing IOUs.

What is the structure of the capital market? ›


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 one of the main purposes of the capital markets? ›

Capital markets provide forums and mechanisms for governments, companies, and people to borrow or invest (or both) across national boundaries. is basically a system in which people, companies, and governments with an excess of funds transfer those funds to people, companies, and governments that have a shortage of ...

What are the features of capital market answer in brief? ›

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 importance of capital market in economic growth? ›

Capital markets help people with ideas become entrepreneurs and help small businesses grow bigger. Channels savings from investors to businesses for productive use. Drives economic growth by facilitating investments in infrastructure, innovation, and job creation.

Why are capital markets important in international trade? ›

The international capital markets allow individuals, companies, and governments to access more opportunities in different countries to borrow or invest, which in turn reduces risk. The theory is that not all markets will experience contractions at the same time.

What is the theory of capital market? ›

Capital market theory makes reference to multiple forms of analysis that aim to predict the value of securities and the flow of supply and demand in the market. In this section, we'll discuss a model, theory, and hypothesis, all of which are considered integral components of capital market theory.

What is capital market UPSC notes? ›

The capital market serves as the heartbeat of the global economy, facilitating the exchange of financial assets and investments. Central to understanding this intricate ecosystem are the myriad terms and concepts that define its functioning.

What are the 4 main functions of capital market? ›

Functions of the capital market
  • Finally, let's study the functions of the capital market. Raise capital.
  • Connect buyers and sellers of securities.
  • Facilitate economic 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.

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 is capital market and its features and instruments? ›

Also known as the securities market, the capital market is where the funds from the investors are made available to the government and companies for developing their projects. Funding instruments traded in the capital markets include debentures, shares, bonds, debt instruments, ETFs, etc.

What is the definition of a capital market? ›

Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market.

What is the best definition of capital market? ›

Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions.

What is not the feature of capital market? ›

The correct option is Co-promotes state-level venture funds.

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