Exercise Solutions Available
Step-by-step answers for all textbook questions in this chapter
Quick Summary
The capital market provides long-term finance to companies and governments. It supports major investments such as buildings, machinery, expansion projects, and infrastructure. Its two main parts are the primary market, where new securities are issued, and the secondary market, where existing securities are traded.
Meaning and Features
- Deals in medium-term and long-term funds
- Helps create fixed capital
- Includes shares, debentures, bonds, and long-term government securities
- Connects investors with organisations needing long-term finance
- Usually involves organised institutions and regulatory supervision
Importance of Capital Market
1. Provides long-term finance for business growth. 2. Encourages saving and investment by giving investors different securities to choose from. 3. Supports industrial development through capital formation. 4. Promotes liquidity when listed securities are traded in the secondary market. 5. Helps economic development by financing productive assets.
Divisions of Capital Market
Primary Market
The primary market is also called the new issue market. Companies raise fresh capital by issuing new shares or debentures to investors.
Common methods:
- public issue
- rights issue
- private placement
- offer for sale
Secondary Market
The secondary market deals in existing securities. Investors buy and sell already-issued securities through stock exchanges.
Primary Market vs Secondary Market
| Primary Market | Secondary Market |
|---|---|
| New securities are issued | Existing securities are traded |
| Company receives funds | Investor selling the security receives funds |
| Helps capital formation directly | Provides liquidity and marketability |
| Example: first public issue | Example: share trading on a stock exchange |
Common Instruments
- Equity shares
- Preference shares
- Debentures
- Bonds
- Government securities
Important Questions
One Mark
1. What is another name for primary market? 2. Which market deals in existing securities? 3. Name one long-term financial instrument.
Short Answer
1. State any three features of capital market. 2. Distinguish between primary market and secondary market. 3. Why is capital market important to business?
Long Answer
1. Explain the functions of capital market. 2. Describe the divisions of capital market. 3. Explain the role of capital market in economic development.
Common Mistakes
- Writing that capital market is for short-term funds.
- Saying the company receives money in every secondary-market trade.
- Treating stock exchange and capital market as identical terms.
- Forgetting to mention both liquidity and capital formation in answers.
Revision Checklist
- [ ] Meaning and features of capital market
- [ ] Primary market and secondary market
- [ ] Four methods of new issue
- [ ] Long-term instruments
- [ ] Difference table ready for exam writing