What is a Capital Market?

By Nitin Deshmukh

A market where a buyer and a seller engage in buying and selling of shares, bonds, derivatives and other financial instruments is called a Capital Market. It helps in channelizing money from savers to institutions, who in turn invest in businesses.  

About the Indian Market

The Capital and Securities market has a long history in India. It made a slow start in the country. Initial traces of trading date back to the 18^th century in the securities of the East India Company in Mumbai and Calcutta. In that period, brokers used to gather under a tree for trading. The introduction of joint stock companies in 1850 was a turning point in capital markets. This gradually made way for the formation of the first organized stock exchange in the country. Finally, in July 1875 – “The Bombay Stock Exchange” came into being. In 1894, Ahmedabad and Calcutta Stock Exchanges were established.

Trend of Indian Capital Market

The stock market of India has a history of more than a century, but due to accumulation of money among a few essential industries, the biasness in economic policy and planning, lack of trust in markets and the focus on state growth created an environment which was not favorable for capital market.

Major changes took place in the nineties when globalization, liberalization and privatization transformed the economic environment. Some major market scams and volatile stock prices jolted the capital markets, but overall, it experienced a steady growth. Reforms in response to the Currency Crisis in 1991 helped in transformation of capital markets. This resulted in growth of market size and efficiency. In terms of raising capital from the market, number of stock exchanges, number of listed stocks, number of investors, trading ratios and trading volumes, turnover in stock exchanges and technological sophistication, the growth of the capital market was remarkable. There was a drastic reduction in transaction costs and an improvement in efficiency. Institutions like SEBI, Clearing House Corporation and NSE came into the picture. Other improvements took place like market-based pricing of issues, screen-based trading, Demat of securities, rolling settlement, introduction of systems for managing risks, inclusion of derivative trading, investment in foreign market and disclosure and investor protection measures. These combined and transformed the Indian capital market from an oligopolistic broker controlled, technologically backward and inefficient market, to a sophisticated and transparent market with a high level of market efficiency.

One of the major reforms was the replacement of the ‘Open Outcry’ system with the ‘Electronic Order Book’ system set up for trading stocks (equity) and bonds (debt instruments) in 1994 by NSE, followed by BSE in 1995.

The NSE introduced integrated national market through satellite communication systems to remove one of the main shortcomings. Through this system, “order can be matched more efficiently; and there is no physical barrier as orders can be placed from any part of the country, and can be matched with any order from any other part of the country”.

Another shortcoming was the counterparty risk. It means one of the parties declares itself as bankrupt in a contract. In April 1995, BSE was closed for three days due to cascading defaults in connection with the bankruptcy issue. In 1996, National Securities Clearing House Corporation (NSCC) established what is commonly known as a “Clearing House”.

Till 1996, shares were transferred physically. Delivery of physical shares has the issue of bad delivery resulting in a lot of back office work. This was resolved through the establishment of depositories as per the Depositories Act – 1996. It maintains shares in electronic form, thus eliminating physical transfers. Two commonly known depositories are – National Securities Depository Limited (NSDL) - by NSE, and Central Depository Services Limited (CDSL) - by BSE.

Till 1994, Indian investors were restricted to invest in the Indian market only. This situation changed in 1994 with the introduction of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs), hence enabling Indian investors to invest abroad.

The Indian Capital Market has come a long way from the era of people shouting loudly for buying/selling of shares to trading shares with just one click. But still, the Indian market lags behind foreign markets. Still, some of the products are not part of the Indian trading system, and technological advancements like ‘High Frequency’ trading is still not common in Indian market. There are enormous opportunities in Indian Capital markets.

Skill Sets

One needs to deal with numbers day in and day out. A good analytical and computational skill is much required. Some job roles require number crunching tasks, as well as a bit of programming the logic and reporting the data, hence multi- tasking is very much required. Capital markets deal with money in denomination of millions and billions, so it’s a stressful and tense environment. An individual needs to be prepared for working in a high pressure situation.    

Career Opportunities

Capital Market is a part of Finance. Students interested in Finance can opt for this field. Like any other field, this also requires some fundamental skill sets and basic attributes. Career opportunities are much diversified as there are number of financial products and numerous associated activities. Job roles in capital markets are –

1. Credit/Risk Analyst, Compliance Manager in banks (in Retail and Investment banks),  
2. Portfolio Manager, Fund Manager, Hedge Fund Trader in Real Estate or Brokerage firms
3. Actuary, Underwriter in Insurance companies
4. Financial Planner (Chartered Financial Planner)
5. Research Analysts in Rating companies

    

About the Author:

Nitin Deshmukh is an Associate Consultant with Infosys Ltd. He completed his MBA-Finance from Institute for Financial Management & Research (IFMR) and has a keen interest in the capital markets domain and actively trades in equities.