How Indian Capital Market works

How the Indian Capital Market Works

by Prateek Mazumder on Basic Finance, Investing Basics

“The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions.”

 – Seth Klarman

Capital markets, more commonly referred to as the stock markets have been in existence for centuries.  The British East India Company was the first company to invite the public to buy shares in the company. Since then, over the years, markets have gone through tremendous changes. The way the market works, the asset classes, the framework of the exchanges and everything has been evolving over time. The changes have been brought in gradually according to the convenience of the investors and market participants. Also in order to prevent market participants to take undue advantage of information in order to gain monetary benefits, the Securities Regulatory bodies over the world have surveillance methods for mitigation of such acts.

Elearnmarkets today will tell you how the Indian Capital Market works. We will discuss the functions of the stock market and who are the intermediaries. Then we will move on to the structure of the capital markets in India and finally recognize the role of the Securities Exchange Board of India (SEBI) in our stock market scenario.


But first, what is the difference between capital market and money market?

We have provided you the answer to this question in the table below:


Money market

Capital Market


Money Market provides short-term borrowing and lending for providing short-term liquidity to the Global Financial System.

A capital market is a type of financial market where long-term securities are issued and traded

Maturity period

It deals with the borrowing and lending of short-term finance which is of one year or less.

Capital Market deals with the borrowing and lending of long-term finance (more than a year)
InstitutionsThe institutions involved in Money Market are Commercial Banks, Central Banks, Non-Banking Financial Institutions (NBFCs)Important Institutions of the Capital Markets are Stock Exchanges, Commercial Banks, NBFCs like Insurance Companies etc.
InstrumentsCredit Instruments used by Money Market are Call Money, Collateral Loans, Acceptances, Bills of exchange.

The main instruments of Capital Markets are Stocks, Shares, Debentures, Bonds, and Government Securities.


Since the duration of credit is much lesser in Money Markets, the degree of risk is smaller.

In the Capital Market, the risk is much greater in terms of degree and nature as it is a long-term investment.
PurposeThe short-term credit requirements of the companies like the working capital of the industrialists are catered by the money market.

On the other hand, the Capital Market provides fixed capital to buy land and machinery etc and caters the long-term needs of the industrialists.

Functions of Capital Market:

While from a broader perspective, Capital Markets is viewed as a market of financial assets with long or infinite maturity, it actually plays a very important role in mobilizing resources and allocating them to productive channels. So it can be said that the process of economic growth of a country is facilitated by the Capital Markets. The important functions and significance of the markets have been discussed below: –

1. Economic Growth: The Capital Markets help to accelerate the process of economic growth. It reflects the general condition of the economy. Capital Market helps in the proper allocation of resources from the people who have surplus capital to the people who are in need of capital. So,  we can say that it helps in the expansion of industry and trade of both public and private sectors leading to a balanced economic growth in the country.

2. Promotes Saving Habits: After the development of Capital Markets, the taxation system, and the banking institutions provide facilities and provisions to the investors to save more. In the absence of Capital Markets, they might have invested in unproductive assets like land or gold or might have indulged in unnecessary spending.

3. Stable and Systematic Security prices: Apart from the mobilization of funds, the Capital Markets helps to stabilize the prices of stocks. Reduction in the speculative activities and providing capital to borrowers at a lower interest rate help in the stabilization of the security prices.

4. Availability of Funds: Investments are made in Capital Markets on a continuous basis. Both the buyers and sellers interact and trade their capital and assets through an online platform. Stock Exchanges like NSE and BSE provide the platform for this and thus the transactions in the capital market become easy.

Capital Market Intermediaries:

Financial Intermediaries are the organizations which help in the transfer or channeling of funds from those who have surplus funds to those who are in need of it. They act as a middleman in connecting the surplus parties to the deficit ones. A classic example can be a bank which accumulates bank deposits and uses them to provide bank loans.

The main Financial Intermediaries of India include:

  • Stock Exchanges: These include the NSE (National Stock Exchange), BSE (Bombay Stock Exchange), MCX (Multi Commodity Exchange), etc
  • Banks
  • Insurance Companies
  • Pension Funds
  • Mutual Funds

Structure of the Capital Market:

The capital market in India consists of the following structure:


To know more about the  working and structure of the Indian Capital Market, you can watch the video below:

Role of SEBI in Capital Market:

The Securities Exchange Board of India (SEBI) regulates the functions of the Securities Market in India. It was set up in 1988 but didn’t have any legal status until May 1992, when it was granted powers to legally enforce its control over the financial market intermediaries. With the bloom of the scale of actions in the financial markets, there were a lot of malpractices taking place. Practices like a false issue, delay in delivery, violation of rules and regulations of stock exchanges are on a rise. In order to curb these malpractices, the Govt. of India decided to set up a regulatory body known as the Securities Exchange Board of India (SEBI).

The roles and objectives of SEBI are elaborate and have been described as below:

  • Regulation of the activities of the stock market
  • Protecting the rights of investors
  • Ensuring the safety of the investments.
  • To prevent malpractices and fraudulent activities.
  • To develop a code of conduct for the intermediaries such as brokers, mutual fund sellers etc.

Recent Developments in the Indian Capital Market:

The Indian Capital Markets have been going through various developments over the years and the most significant of them have been listed below: –

1. New Measures of Risk Management: Investments in Capital Markets are exposed to various risks. Though some are systematic risks, others happen as result of unsystematic market activities.

  • Measures to reduce Price Volatility: Volatility is the fluctuation of price movements. It is the rate of up or down movement of the stock price. Volatility is regarded as a negative factor for the markets as it represents uncertainty and risk. After the introduction of Index futures trading in 2000, there was a relative reduction in the volatility of the prices.
  • Circuit Breakers: Circuit breakers were introduced to reduce large sell-offs and panic selling. Sometimes it is also called a “collar”. If an Index or a particular stock rises or falls a certain percentage of 10%, 15% or 20%, trading is halted by the exchange in that stock or index for a certain period of time to curb the panic and check for market manipulations.

2. Investor Awareness Campaign: To make the markets more secure for the investors, SEBI introduced the Investor Awareness Campaign by making an official site for this.

3. Investigations: In case of any violation of the rules and regulations of the SEBI Act 1992, the investigation is carried out by SEBI.

4. T + 2 Settlement Cycle: Currently in the Indian Capital market, the settlement cycle is in the “T+2” cycle. Here, ‘T’ means the trading day and the ‘T+2’ settlement means the settlement and delivery of the shares takes place in the 2nd trading day after the trade takes place

5. Ban on Insider Trading: Individuals possessing confidential information of a particular company can use the information to unethically profit from the stock markets. SEBI has made it clear and mandatory to restrict all kinds of insider trading in the Indian Capital Markets.


With the ever-changing regulations laid by SEBI and omnipresent opportunities, understanding capital markets can sometimes become as complex as solving a Rubik’s cube.

To construct a multi-storeyed building, the base has to be made as sturdy as possible. Similarly, to eventually become successful in the bourses, one needs to understand the basic concepts from its very roots which cannot be done by reading a single article. If you wish to become an active participant in the markets, having rudimentary knowledge is of critical importance. This can be achieved by taking up NSE Academy Certified Capital Market Professional(E-NCCMP) course.

After all, who doesn’t aspire to be the next Charlier Munger or Warren Buffet of their generation? Let us all start walking on the path which will lead us closer to our goal.

Disclaimer wants to remind you that all our content is created solely for the purpose of education. No strategy, stock, commodity, fund or any other security discussed here is any way a recommendation for trading or investing. will not be any way responsible for trading losses incurred by any individual or entity for trading with real money. Please take advise of certified financial advisers before trading or investing.


  • Thanks. very simple and well discribed can be understand easly by the beginer what is excatly the stock trading is all about.

  • Well described for a novice like me. Sir, we all have heard about the trial of former Mckinsey chief Rajat Gupta in the US, as well as the Galleon hedge fund founder Raj Rajaratnam name, for insider trading. But in India, insider trading is not a criminal act and more importantly nobody has ever been jailed for it. Then how safe are the retail investors in India?

  • By reading all this information it clears that the capital market has huge scope and it is easily understandable by the people who interested

    • Financial Intermediaries are institutions that act as middlemen between two parties in a financial transaction.

      Let us understand this with the help of the following examples:

      Bank: Individuals having surplus funds deposit their surplus funds as savings in a bank, the bank, in turn, lends these funds in the form of capital to companies, other individuals who are in need of it.The parties (borrowers) receiving the capital from the bank pay an interest on such funds to the banks.A portion of this interest is then paid to the individuals who have deposited their funds(lenders) with the bank.The remaining portion is the bank’s profit.

      Mutual Funds: The mutual fund manager connects the individual shareholder with the company by purchasing stocks of a company that he expects will outperform the market.In this way, the mutual fund manager provides the individual shareholder with assets(i.e shares of the companies), the companies with capital and the overall market with liquidity.

      Stock Brokers : Stock Brokers bring together buyers and sellers of securities thereby bringing in liquidity in the securities market.

      Insurance Companies : Insurance companies collect premium from the individuals and provide them policy benefits to them.

      There are several other financial intermediaries apart from the ones discussed above.
      To learn more about the role of various financial intermediaries you may do: NSE Academy Certified Capital Market Professional(E-NCCMP)
      Happy Learning!

Please leave a comment