An efficient
capital market is an essential pre-requisite for industrial and commercial development
of a country. An organized and well-developed market operating in a free market
economy ensures the best possible co-ordination and balance between the flow of
savings on the one hand and the flow of investment leading to capital formation
on the other. It also directs the flow of savings into most profitable channels
and thereby ensures optimum utilization of financial resources.
The importance
of capital market in the process of economic development of a country can be
described as below:
1. Mobilizing
Savings: The capital market plays a vital role in mobilizing savings to put
it in productive investment, so that the development of trade, commerce and industry
could be facilitated. In this process the capital market helps in the process of
capital formation and hence the economic development. The capital market acts as
a bridge, between savers and investors.
2. Stability in
Value: In case of a developed capital market, the experts in banking and
non-banking intermediaries put in every effort in stabilizing the values of
stocks and securities. This process is facilitated by providing capital to the
needy at a lower rate of interest and by cutting down the speculative and
unproductive activities.
3. Encouragement
to Economic Growth: The process of economic growth is made easier through the capital
market. The various institutions of the capital market give quantitative and
qualitative direction to the flow of funds. The proper flow of funds leads to
the development of commerce, trade and industry.
4. Inducement to
Savings: Savings are the backbone of any nation’s economic development. If
capital markets are developed in less developed areas, people will get induced
to save more because savings are facilitated by banking and non-banking financial
intermediaries.
Thus, it is
clear that the capital market is the life-blood of economic development of a
country. If the capital market is not developed, it will lead to misuse of
financial resources. The capital market plays a significant role in diverting
the wrongful use of resources to their rightful use.
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