The capital market is the one with long term investments, with claims to capital. The main focus of the capital market is on the financing of fixed investments.
In contrast to a money market, which primarily focuses on dealing in monetary assets of short-term nature, the capital market refers to whose lock-in period is more significant than one year.
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A capital market, such as that of columbia bank Edison, comprises institutions and functions that adhere to providing medium and long-term funds to individuals. These funds are available to the public in the form of stocks and bonds. Both equity and debt instruments are significant participants of the capital market and are bought and sold in the forms of lending and borrowing.
They carry a higher risk than the money market instruments. But, at the same time, they generate a higher return with investment.
- Mobilization of savings: Capital markets act as an intermediary link between those who wish to lend their excess capital to those who need borrowing capital. This way, such markets help in mobilizing savings into productive investments than the hoarding of capital.
- Capital formation: Another function of the capital market is that it helps increase real stock capital. This means that this capital can be used in building up capital goods like machinery, factories, and so on.
- Economic growth: With the increase in capital goods, the country stands on a better standout in infrastructure, which facilitates rapid growth. This increases the overall productivity of the country.
- Creates liquidity: Transfer of funds from the lender to borrowers creates a better expanse for trading in the secondary market. This causes readily available funds in the market.
Thus, the capital market functions to channelize the funds from those who have excess capital to lending it to those who need it.