Md. Tanveer Rahman –
The capital market is a financial market where long-term securities such as stocks, bonds, and other financial instruments are traded. The capital market helps a nation’s economy grow by facilitating the allocation of capital, the mobilization of savings, and the provision of liquidity to investors.
Primary and secondary markets are two ways to categorize the capital market. New securities are issued in the primary market to raise money for businesses or governments. The sale of securities to the general public through initial public offerings (IPOs) or private placements is a function of the primary market. The trading of already-issued securities, however, takes place on the secondary market. The secondary market enables price discovery and offers investors liquidity.
The capital market has a significant impact on the economy. It is essential to the mobilization of savings, capital allocation, and encouragement of economic growth. Here are some ways that capital markets affect the economy:
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Mobilization of Savings: The capital market facilitates the mobilization of funds by giving both retail and institutional investors a means of purchasing securities. Savings can be placed in securities like stocks, bonds, and mutual funds, which are subsequently used by businesses and governments to raise money for their endeavors. It would be challenging for businesses and governments to raise the money necessary to finance their projects without the stock market.
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Allocation of Capital: By allocating savings to the most profitable uses, the capital market is essential in the distribution of capital. Securities that investors think would produce the best returns are available for purchase. Governments and businesses can also raise money on the capital market to fund their initiatives. So, the capital market aids in allocating money to areas where it is most needed and where it will provide the highest returns.
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Promotion of Economic Growth: The capital market also fosters economic growth by giving businesses and governments the money they need to invest in new initiatives. Economic growth, employment creation, and higher productivity result from new projects. The capital market significantly contributes to economic growth by giving businesses and governments a means of raising funds.
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Risk Sharing: By enabling investors to diversify their portfolios, the capital market also makes risk-sharing easier. The ability to invest in a variety of assets allows investors to spread their risk. Risk-sharing allows businesses and governments to raise money from a wide number of investors.
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Innovation: The capital market fosters innovation by giving money for fresh concepts and initiatives. Investors are eager to put money into fresh, creative concepts they think have the potential to produce large profits. The capital market contributes to economic growth and development through funding innovation.
It should be noted that the capital market is essential to a nation’s economic growth. It makes saving, capital distribution, and economic growth promotion easier. Together with these additional benefits, the capital market promotes innovation, allows risk-sharing, and gives investors access to liquidity. Therefore, it is crucial for the general development of the economy that the capital market continues to grow and develop.
Md. Tanveer Rahman is the Portfolio Manager at CAPM Advisory Limited
