Saturday, August 22, 2009
As the name denotes the capital market is a market of capital funds. Accordingly by capital market we mean such a market where the transactions for new capital are made. “Therefore the capital market is consisted of people and institutions which become helpful in raising new capital. The financial institutions provide loans to those sectors of the economy where their capital is protected and the income from such advancing is sure and well estimated. The capital market is sub-divided into
(1) Primary Market and (2) Secondary Market
The primary capital market is concerned with the sale and purchase of new securities. The new securities are issued for the first time. While the secondary capital market is concerned with the sale and purchase of even the old and already issued securities. The financial institutions which are the components of money market make the transactions regarding monetary assets, monetary instruments and near monics. The purpose of such all instruments is to raise funds directly and indirectly. In this way capital market not only becomes a source of capital availability but it also leads to a better allocation of capital. Thus it serves as a ready market for those who wish to borrow or who wish to supply funds. The borrowers and lenders do not have to search out each other. Thus though money market a better relationship comes into being amongst the borrowers and lenders. In this way gap between demand for money and supply of money gets shortened. According the capital market promotes investment in a country.
MAIN INSTRUMENTS OF CAPITAL MARKET
The capital market instruments are debt and equity instruments. These instruments are not liquid in nature and have maturities more than one year. The principal capital market instruments are (1) Shares (2) Debentures (3) Mortgages and (4) Securities of the government. These instruments used in the capital market are discussed as under.
(1) Shares: Finance is essential to any business. The larger the business grows, the wider the sources of finance should be available to it. A public company raises capital through the sale of shares called equity financing and by borrowing named as debt de-financing. Shares are the equity claims on the net income and assets of a company. The holders of ordinary shares or equity shares are the real owners of the company. In case of bankruptcy claims of share holders are paid only after the other claims have been paid.
(2) Debentures: Debenture is a long term loan to the company with a very strong credit rating. Each year debenture holders receive a fixed rate of interest whether a company is making profit or not if the company goes bankrupt, the debenture holders must be paid before any other claim is met.
(3) Mortgages: Mortgages are long term loans provided to individuals, firms against tangible security. When the loan is not paid in accordance with the terms of loan the title of the property is transferred to the creditors. The commercial banks and specialised financial institutions are actively engaged in providing long term loans to business in Pakistan.
(4) Federal Investment Bonds: The Government of Pakistan mobilizes long term loans by the sale of Federal Investment Bonds having a maturity of 15 to 20 years. The objective of introducing this debt instrument is to mobilize private savings, contain inflationary pressure in the economy by absorbing funds of the financial sector and also to provide investment opportunities to the financial institutions.
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