Given below are two statements: Statement I : Capital market plays an important role in mobilising resources and diverting them in productive channels. Statement II : Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. In the light of the above statements, choose the correct answer from the options given below:
Both Statement I and Statement II are true
Understanding the Capital Market Statements
The question asks us to evaluate two statements about the capital market and determine their truthfulness.
Let's analyze each statement carefully based on the fundamental definition and function of a capital market.
Analyzing Statement I: Capital Market's Role in Mobilization and Productivity
Statement I says: Capital market plays an important role in mobilising resources and diverting them in productive channels.
- The capital market is a crucial part of the financial system where long-term funds are raised and invested.
- It acts as an intermediary that links savers (who have surplus funds) with investors (who need funds for long-term projects).
- Savers, such as individuals, pension funds, and insurance companies, invest their savings in capital market instruments like stocks and bonds.
- Businesses and governments issue these stocks and bonds to raise capital for various purposes, including expanding operations, investing in new technology, funding infrastructure projects, and managing debt.
- By facilitating this flow of funds, the capital market effectively mobilizes resources (savings) that would otherwise remain idle.
- These mobilized resources are then channelled into productive activities within the economy, leading to job creation, economic growth, and development.
- Therefore, Statement I accurately describes a primary function of the capital market: mobilizing savings and directing them towards productive investments.
Analyzing Statement II: Capital Market as a Market for Financial Securities
Statement II says: Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc.
- This statement defines the nature of the capital market as a marketplace for specific types of financial instruments.
- Financial securities traded in the capital market are typically long-term instruments, meaning they have a maturity period of more than one year or represent ownership equity.
- Key examples of such securities include:
- Stocks (Equities): Represent ownership in a company. When you buy stock, you become a shareholder.
- Bonds (Debt Securities): Represent a loan made by an investor to a borrower (typically a corporation or government). The borrower promises to pay interest and repay the principal amount at a future date.
- The capital market provides a platform where these stocks, bonds, and other long-term securities are bought and sold by various participants, including individual investors, institutional investors, corporations, and governments.
- This trading happens in both primary markets (where securities are issued for the first time) and secondary markets (where existing securities are traded among investors).
- Therefore, Statement II correctly identifies the capital market as a venue for trading long-term financial securities like stocks and bonds.
Conclusion on Capital Market Statements
Based on our analysis, both Statement I and Statement II accurately describe essential characteristics and functions of the capital market.
- Statement I highlights its crucial role in economic development through resource mobilization and allocation to productive uses.
- Statement II defines it as the market specifically for trading long-term financial instruments such as stocks and bonds.
Both statements are fundamentally true descriptions of how capital markets operate and their importance in the financial system.
| Statement | Description | Truthfulness |
|---|---|---|
| Statement I | Role in mobilising resources & diverting to productive channels. | True |
| Statement II | Market for trading financial securities like bonds, stocks, etc. | True |
Revision Table: Key Concepts
| Concept | Explanation |
|---|---|
| Capital Market | Market for buying and selling long-term debt or equity-backed securities. |
| Primary Role | Facilitating the flow of funds from savers to investors for long-term projects. |
| Key Instruments | Stocks (Equity), Bonds (Debt), Derivatives, etc. |
| Functions | Resource mobilization, Capital formation, Providing liquidity, Price discovery. |
Additional Information: Capital Market Structure
The capital market is typically divided into two main parts:
- Primary Market: This is where securities are issued for the first time directly by the borrower (e.g., a company or government) to investors. Examples include Initial Public Offerings (IPOs) for stocks or new bond issuances. The funds raised in the primary market go directly to the issuer.
- Secondary Market: This is where existing securities are traded among investors after they have been initially issued in the primary market. Stock exchanges (like the NYSE or NASDAQ) and bond markets are examples of secondary markets. The original issuer is not involved in secondary market transactions, and the funds exchange hands between the buyer and the seller of the security.
Both primary and secondary markets are essential for the effective functioning of the capital market. The secondary market provides liquidity for the securities issued in the primary market, making them more attractive to investors, which in turn encourages investment in the primary market.
Important Questions from Capital Market
- Which of the following government financial transactions would be classified as a capital receipt?
What is the market price per share (face value = Rs. 100) as per Walter model if the profitability rate of the company is 16 percent, payout ratio is 80 percent and the cost of capital is 10 percent?
A company's share is currently selling for Rs. 50 and is expecting a dividend of Rs. 3 per share after one year which is expected to grow at 8% indefinitely. What is the equity capitalisation rate?
Amount unutilised in capital gain account scheme for which exemption claimed u/s 54 shall be treated as long-term capital gain, if
Choose the correct code for the following statements being correct or incorrect.
Statement I : FX Spot is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date.
Statement II : The date of maturity of a forward contract is more than two business days in future.
