Theory question 109
Financial InstitutionsSection B: answer three questions only from this section.
(a) Explain the term capital market
(b) How is the capital market different from the stock exchange?
(c) What are the advantages of the capital market?
Show the model answer
(a) The capital market is the market for medium- and long-term funds
Institutions include development banks, insurance companies, mortgage banks, issuing houses and the Stock Exchange
(b) The capital market is the whole system for raising long-term funds; the stock exchange is one institution within it
The stock exchange deals mainly in buying and selling existing (second-hand) securities; the capital market also covers new issues and long-term loans
(c) Provides long-term funds for industry and government
Mobilises savings and encourages investment
Gives investors a way to earn income (dividends, interest)
Helps government finance development projects
Promotes economic growth and industrialisation
Helps indigenisation and wide ownership of companies
Remember: stock exchange ⊂ capital market.