Everyone discuss about share market and share , but we do not know the components of share market . The capital market is one of the component of share market for which capital market plays role as capital supplier for share market. The capital market plays an important role in mobilizing savings and channelizing them into productive investments for the development of commerce and industry. As such , the capital market helps in capital formation and economic growth of the country .
In my view , capital market is the base of development of any economy . As we know that , for development of any country , there should be investment in large amount in the economy. For investment there should be capital and this capital comes out from the saving of the people of this particular country. In this process , the capital market acts as an important link between savers and investors. Funds flow into the market from individuals and financial intermediaries which are observed by commerce , industry and government. It thus facilitates the movement of stream of capital to be used more productively and profitably to increase the national income .
The capital market provides incentives to savers in the form of interest or dividend and transfers funds to investors. Thus it leads to capital formation . In fact , the capital market provides a market mechanism for those who have savings and to those who needs funds for productive investments . It diverts resources from wasteful and unproductive channels such as gold ,jewellery , real estate, ,conspicuous consumption, etc to productive investments.
A well developed capital market encourages economic growth .The various institutions which operate in the capital market give quantitative and qualitative direction to the flow of funds and bring rational allocation of resources .They do so by converting financial assets into productive physical assets. This leads to the development of commerce and industry through the private and public sector , thereby inducing economic growth.
In an underdeveloped country where capital is scarce , the absence of a developed capital market is a great hindrance to capital formation and economic growth . Even though the people are poor , yet they do not have any inducement to save . Others who save , they invest their
savings in wasteful and unproductive channels , such as go;d , jewellery , real estate , conspicuous consumption, etc . Such countries can induce people to save more by establishing banking and non banking financial institutions for the existence of a developed capital market . Such a market can go a long in providing a link between savers and investors, thereby leading to capital formation and economic growth.———————————————————————————————————————————————————————————————————————The End————————————————————