Capital market is a market where the prices of financial instruments are derived by the supply and demand functions of a central body or “the firm”. These functions of the capital market to provide the basis on which business activity is regulated. The functions of the capital market to help the enterprise to deal with various economic problems by providing information as to how the prices of its products and services are determined. By communicating the data regarding the prices of its products and services to the public, the enterprise is able to perform and manage all its activities in an effective and efficient manner.
In order to understand the concept behind the functioning of the capital market, it is important to understand the capital structure of a firm. There is first a central body which represents the whole community of business interests, and then there are the enterprises or firms, which are the owners or the administrators of the money. Money is generated by the profits and the losses earned by the firm. There is also the risk factor, which is the risk arising from the value of the stock or the equity and the cash flow of the company.
The functions of the capital market are further understood by analyzing the relationships between the various firms and the central body. The main function of the stock exchange is to determine the values of the securities and to make the exchange of the securities between the various firms. Another major role is performed by the futures market. The functions of the banks are mainly related to the issue of bank notes and to the clearing of checks. On the other hand, the functions of the brokers include buying of stocks and the sale of stocks.
The functions of the capital market to facilitate the functioning of the economy. It provides an opportunity for the firms to expand their operations by offering new shares or equity to the public. It also facilitates the transfer of capital from one firm to another. A firm can increase its capital by issuing shares or equity. It can also borrow funds from other firms to increase its capital.
The functions of the stock market should be under the supervision of the proper authorities such as the banks. The supervision should be given with a view to ensure that the stock market does not suffer from any negative impact on the economy. It should also be beneficial to all stakeholders. For example, it would be useful if the banks succeed in increasing the amount of money circulating in the economy. In turn, this would reduce the unemployment rate and increase economic activity.
There are various other functions of the capital market. One important function is that of inflation control. It is the role of banks to stabilize and eventually control the level of inflation. To do this, banks take into consideration the supply and demand of money. In addition, capital market influences real estate markets and overall economic conditions of a country.