Capital markets are a subset of financial markets. They refer to the marketplaces with long-term debt and equity securities purchased and sold. Savings and investments get channeled in these markets among the suppliers and those requiring it. Suppliers are people or institutions with capital that lend or invest, which include banks and investors. Businesses, governments, and individuals usually look for capital in this market.
The most common capital markets are the stock and the bond markets. They look to improve transactional efficiencies by providing suppliers with those looking for capital and giving them a place to exchange securities. They play a critical role in modern economic functions because they shift money from those who possess it to those who need it for productive purposes.
Capital Markets vs. Investment Banking
The following table summarizes the main differences between Capital Markets vs. Investment Banking:
| Basis of Difference | Capital Markets | Investment Banking |
| Financial Transactions | Deals with medium and long-term financial transactions. Medium 1-5 yrs. Long Term Over 5 years. | Involves organizing large financial transactions like mergers or initial public offering (IPO) underwriting. There is no specific term involved. |
| Purpose | Become part of the asset base of the firm. | To advise businesses and governments to meet their financial challenges. |
| Market Target | Formal and Regulated | Narrow target market which includes high net worth individuals, large corporate houses, governments, and more. |
| Maturity Period | No stipulated time | No stipulated time |
| Risk Tolerance | High Risk | Higher Risk due to nature of business and weaker regulatory income, |
| Returns | Market Linked | Margin business i.e. big fees from limited customers. |
| Regulation | Regulated by the country’s security agency. | Regulated by the country’s security agency. |
| Participants | The public also participates significantly followed by Stockbrokers, MFs, retail investors, insurance companies, stock exchanges, and underwriters. | The public does not participate much. Banks, financial institutions, corporations, pension funds, governments, and hedge funds. |
| Relevance to Economy | Helps mobilize savings | Promotes business growth |
| Investment Duration | Long term | Long term |
Role of Capital Market in Economic Growth
The role of capital market in economic growth is that it acts as a conduit through savings channeled into productive investments. It is present between those who possess capital to invest and those who look for capital for productive purposes. It facilitates the transfer of funds from savers to borrowers to enable businesses to undertake expansion projects, innovate, and enhance operational efficiencies, which leads to job creation, more production, and economic expansion.
Capital markets also offer equity for infrastructure demands. It also empowers the government strategy of social inclusion and economic growth by providing platforms wherein industries can compete globally, forge private-public partnerships, use capital efficiently, boost domestic productivity and spur growth, global integration, and improve economic development.
Capital markets are mainly helpful for organizations willing to avail funds for a small price without going in for a change in ownership rights from private holding to equity holding. It’s mechanism for regulating the markets, covering risks according to appetites, ensuring good investor returns, and eliminating the complete decay of stock market policies.
The channels via which the role of capital market in economic growth occurs are as follows:
· Forming a Link between Suppliers of Capital and Users
The connection between the agents with a monetary deficit and a surplus can directly occur via direct financing. It can also happen through a financial intermediary via ‘indirect financing,’ where a situation with certain operators helps form the connection between the real economy and the financial market. In this case, the financial intermediaries usually will be banks, investment funds, pension funds, insurance companies, or other non-bank financial institutions.
· Promoting Saving and Investments
The capital markets amplify the proportion of long-term savings (pensions, life covers, etc.) channeled to long-term investment. They help the contractual savings industry (pension and provident funds, insurance companies, medical aid schemes, collective investment schemes) mobilize long-term savings from small individual households to long-term investments.
It fulfills the transfer of present purchasing power, in monetary form, from surplus to deficit sectors in exchange for reimbursing purchasing power in the future. In this way, the capital markets help corporations to raise funds to finance their investment in assets. It encourages vaster ownership of productive assets by small savers. It offers avenues for investment opportunities that maximize domestic savings and investments, resulting in economic growth.
· Proper Allocation of Scarce Financial Resources
The capital markets efficiently allocate scarce financial resources by providing various financial instruments with different risk and return characteristics. This competitive pricing of securities and a vast range of financial instruments facilitate the investors to properly allocate their funds based on the risk and return appetites to support economic growth.
Wrapping Up
The role of capital market in economic growth is undeniable. It offers the necessary funds and drives innovation and efficiency in the economy. Many times, they are called the backbone of a financial system. They play an integral part in fostering a robust and dynamic economic environment that leads to prosperity in terms of careers in the various financial and investment banking industries.
