Understanding capital markets and how they drive economic growth, liquidity and long-term wealth creation

India’s capital markets drive economic growth by channelling investor funds to businesses and governments. This fosters productivity, infrastructure development, innovation, job creation and the country’s long-term financial stability.

Furthermore, capital markets act as powerful engines of international influence and financial prudence. Currently, India’s capital markets are on a long-term growth trajectory, boosted by a young population and their status as one of the fastest-growing major economies. The nation has over 19 crore demat accounts and a combined market capitalisation of around $5 trillion.

What are capital markets?

Capital markets are platforms where securities, including bonds, stocks and derivatives, are traded. Unlike short-term money markets, capital markets focus on long-term funding and extended projects. This enables corporations to raise capital and allows governments, both central and state, to finance major projects.

• Primary markets: In these markets, corporations raise capital by issuing fresh securities through IPOs, FPOs, or bond offerings. In such cases, the issuer directly receives the funds.
• Secondary markets: Once issued, these securities are actively traded on exchanges such as the NSE and BSE. The funds raised are utilised by the issuer for business expansion. Trading of these securities on exchanges provides the required liquidity. SEBI ensures compliance and transparency in the management of the entire system, thereby fostering credibility.

Considering the above concepts, let us examine the four pillars of capital markets, which fuel the entire system and serve as the backbone of the country.

Four pillars of capital markets

Equity, debt, derivatives and foreign exchange markets collectively form the four key pillars of the nation’s capital markets. Their main features are discussed briefly below:

Note: The concepts discussed above are illustrative and educational in nature, highlighting how India’s capital markets function through four key pillars that channel domestic and global funds to drive growth, liquidity, and investor participation.

Why does it matter to you?

Capital markets have the potential to directly influence household savings, the nation's inflation and investment returns. This makes it critical for aspiring investors to understand the basic fundamentals of equities, debt markets, derivatives and foreign exchange (forex) markets, along with liquidity and investment principles. Some of these concepts and features are touched upon briefly below:

1. Equities: Investing in equities helps create wealth, thereby boosting portfolio growth.
2. Liquidity: Stocks are liquid in nature, as they can be offloaded on exchanges, contrary to physical assets such as property and physical gold.
3. Efficiency: Markets provide fair pricing and offer diverse investment instruments.

Hence, by acknowledging and understanding how these systems work, investors can better align their financial goals with the nation's rapidly evolving economy, put their savings to good use, and contribute to national growth.

Disclaimer: This article is for informational purposes only and should not be considered financial or investment advice. Investors should consult qualified professionals before making investment decisions.