What is meant by Capital Market? Why is it considered as the most important source of raising finance?

Question

Accepted Answer

**Meaning of Capital Market:**

Capital market is a mechanism meant for the transfer of money capital from investors (savers) to entrepreneurs (borrowers) who need funds for economic activities. It is a financial market for long-term securities where shares, debentures, and bonds are traded. It comprises the primary market (new issues) and the secondary market (existing securities).

**Why Capital Market is the Most Important Source of Raising Finance:**

1. **Mobilizes Financial Resources on a Nationwide Scale:** Capital markets pool savings from millions of individuals across the country and channel them into productive investments, enabling entrepreneurs to raise large amounts of capital.

2. **Long-term Capital Provision:** Unlike banks which provide short-term finance, capital markets cater to the long-term financial needs of businesses, which is essential for setting up industries and enterprises.

3. **Foreign Capital and Know-how:** Capital markets help secure foreign capital and technology, promoting economic growth at a faster rate through participation of foreign institutional investors.

4. **Effective Resource Allocation:** Financial resources are directed to projects capable of the highest yield or to underdeveloped priority areas, promoting balanced and diversified industrialization.

5. **Liquidity to Investors:** The secondary market provides liquidity to long-term securities, encouraging more people to invest by assuring them that they can convert investments into cash when needed.

6. **Price Discovery:** Capital markets facilitate fair price discovery of securities based on demand and supply, helping both issuers and investors make informed decisions.