(2) Capital Market:

Capital market refers to a market where the financial institutions mobilize the savings of the people and
lend them for long term, period for raising new capital in country. Capital Market, in other words, refers to
the long term borrowing and lending of capital funds.

Capital Market Instruments:

The principal capital market instruments used for long term funds are:

(i) Mortgages.

(ii) Corporation bonds.

(iii) State and local government bonds.

(iv) Federally sponsored credit agency securities.

(v) Finance company bonds.

(vi) Commercial banks bonds and commercial paper.

(viii) Corporate stock.

Institutional sources of Capital Market:

There are a number of financial institutions which are directly involved with real investment in the
economy. These institutions mobilize the saving from the people and channel funds for financing the
development expenditure of the industry and government of a country.

The financial institutions take maximum care in investing funds in those projects where there is high
degree of security and the income is certain. The main institutional sources of capital market are as
follows:

(i) Insurance Companies. Insurance companies are financial intermediaries. They call money by
providing protection from certain risks to individuals and firms. The insurance companies invest the funds
in long term investments primarily mortgage loans and corporate bonds.

(ii) Pension Funds. The pension funds are provided by both employees and employers. These funds are
now increasing utilized in the provision of long term loans for the industry and government.

(iii) Building Societies. The building societies are now activity engaged in providing funds for the
construction, purchase of buildings for the industry and houses for the people.

(iv) Investment Trusts. The investment trust mobilize saving and meet the growing, need of corporate
sector, The income of the investment trust depends upon the dividend it receives from shares invested in
various companies.

(v) Unit Trust. The Unit Trust collects the small savings of the people by selling units of the trust. The
holders of units can resell the units at the prevailing market value to the trust itself.

(vi) Saving Banks. The saving banks collect the savings of the people. The accumulated saving is
invested in mortgage loans, corporate bonds.

(vii) Specialized Finance Corporation. The specialized finance corporations are being established to
help and provide finance to the private industrial sector in the form of medium and long term loans or
foreign currencies.

(viii) Commercial banks. The commercial banks are also now activity engaged in the provision of
medium and long terms loans to the industrialists, agriculturists, specialist finance institutions, etc., etc.

(ix) Stock Exchange. The stock exchange is a market in existing securities (shares, debentures and
securities issued by the public authorities). The stock exchange provides a place for those persons who
wish to sell the shares and also wish to buy them. Stock exchange, thus helps in raising equity capital for
the industry

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