Capital market
Also written Capital markets
The market in which companies and governments raise long-term funds — for periods longer than a year — through shares and bonds, together with the secondary market where those securities later trade.
In plain language
The capital market is where long-term money is raised and traded. The workbook defines it as a market for securities where business enterprises and government can raise long-term funds — generally, money provided for periods longer than a year.
It has two halves by instrument. The stock market raises funds through the issue of shares or stock. The bond market raises funds through the issue of bonds — issued in India by the Central and State Governments, corporations and municipal bodies.
And it has two halves by stage. The primary market is where the security is first created and sold, with the issuer dealing directly with investors. The secondary market is where investors then trade it among themselves, and the issuer is not in the picture.
How it works
Against the money market. The money market is the market for financial assets that are close substitutes for money — short-term funds and instruments with a maturity of one year or less, such as bankers' acceptances, negotiable certificates of deposit, repos, T-bills, call/notice money and commercial paper. The capital market begins where that ends.
Primary and secondary. Both the capital market and the money market have two interdependent and inseparable segments:
| Primary market | Secondary market | |
|---|---|---|
| Purpose | Raising fresh capital | Liquidity through trading and settlement |
| How | IPOs, rights issues, offers for sale of equity or debt | Trading on stock exchanges |
| Who deals with whom | Issuer with investor | Investor with investor — issuer not involved |
The workbook's reasoning for why both matter: an active secondary market promotes the growth of the primary market and capital formation, because investors in the primary market are assured of a continuous market where they can liquidate their investments.
Institutions. Stock exchanges are an important constituent of the secondary market of the capital market; clearing corporations settle the trades; depositories hold the securities in electronic form. SEBI's preamble is to protect investors in securities and to promote the development of, and regulate, the securities market — the capital market regulator whose rulings are appealed to the Securities Appellate Tribunal. RBI, as banker to the Government, manages issuances of Central and State Government securities.
A worked example
Illustrative figures. One company, four transactions — sort them.
| Transaction | Market | Segment | Money goes to |
|---|---|---|---|
| IPO of equity shares raising Rs 600 crore | Capital (stock) | Primary | The company |
| 5-year NCDs of Rs 300 crore | Capital (bond) | Primary | The company |
| 90-day commercial paper of Rs 150 crore | Money market | Primary | The company |
| An investor sells 2,000 shares at Rs 845 on the exchange | Capital (stock) | Secondary | The selling investor — Rs 16,90,000 |
The third row is the trap: it is a borrowing by the same company, but with a maturity under one year it belongs to the money market, not the capital market.
The fourth row changes nothing on the company's balance sheet. But without it, fewer investors would have subscribed to the Rs 600 crore IPO in the first place — which is the workbook's point about the secondary market supporting capital formation.
Why NISM asks about it
Chapter 1.1.1 (Financial Market) defines the capital market, its sub-classification into stock and bond markets, and the primary/secondary distinction; Chapter 2 places SEBI as its regulator and SAT as the appellate body. Expect a classification question — which instrument or maturity belongs to which market — and a statement about who deals with whom in each segment.
Common exam traps
- Longer than one year is capital market; one year or less is money market. Commercial paper is money market even when issued by a large company.
- The bond market is part of the capital market. Capital market is not a synonym for stock market.
- Bonds in India are issued by Central and State Governments, corporations and municipal bodies — not only by governments.
- Money markets also have primary and secondary segments. The split is not unique to the capital market.
- In the secondary market the issuer is not involved; in the primary market the issuer deals directly with investors.
- An offer for sale of equity or debt is listed as a primary market route, alongside IPOs and rights issues.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Securities Appellate TribunalThe statutory tribunal established under the SEBI Act that hears appeals from orders of SEBI and of its adjudicating officers, which must be filed within 45 days of receipt of the order.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Financial systemThe whole set of institutional arrangements that move funds from surplus units (households) to deficit units (companies and governments) — made up of financial markets, instruments and intermediaries.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Secondary marketThe market where securities already issued are traded between investors — the money goes to the selling investor, not to the company, and the issuer's capital is unchanged.
- Money Market InstrumentsDebt instruments with maturity of one year or less. Under the PM Regulations they include commercial paper, trade bills, treasury bills, certificates of deposit and usance bills.
- Board for Financial SupervisionThe committee of RBI's Central Board, constituted in 1994, that directs RBI's consolidated supervision of commercial banks, financial institutions and NBFCs.
- Financial marketThe market in which financial assets such as equities, bonds, currencies and derivatives are created or transferred — a mechanism for dealing in financial securities and commodities at low cost.
- Stock exchangeA body of individuals, or a body incorporated under the Companies Act, that assists, regulates or controls the business of buying, selling or dealing in securities.