Exam subjects

for the course International capital market

for students of IER Faculty, EMREI specialty, III nd year
study year 2014-2015, semester I

1. Structure of financial markets

Structure of financial market :
The system of financial markets
Financial markets in the sense of identifying with the capital markets, are well-defined institutions (for example,
New York Stock Exchange, Bucharest Stock Exchange) or the whole set of communication means (for example,
the NASDAQ, RASDAQ), which allow issuance and negotiation of non-bank financial assets by the
intermediaries at a certain price.
The plural of "financial markets" suggests that in a market economy, regardless of its level of development, a
system of financial markets exists, as:
the system of financial markets in the United States of America;
the system of financial markets in Canada;
the system of financial markets in Romania.
The system of financial markets in the United States of America
consists of two or more markets, according to the adopted criterion.
The first criterion concerns duration of the placement, resulting in:
money markets for trading short-term debt instruments;
capital markets that allow negotiation of long-term debt instruments and ownership instruments.
The second criterion respects the nature of traded asset that determines the following types of markets:
the stock market, bond market, commodity market, currency market, options market, futures market.

2. Definition and elements of Capital Market

Definition of Capital Market
The market where investment instruments like bonds, equities and mortgages are traded is known as the Capital
Market.
capital market represents the assembly of relations and mechanisms by which it is realised the transfer of funds
from those who have a surplus of capital towards those who need it, through specific instruments (issued
securities) and specific operators (for example, professional participants on securities market, including
companies for financial investment services, etc.).
Elements of the capital market are:
place of transaction, formed by the whole set of communication means among operators (OTC market) or
among the operators and an institution called the stock exchange;
subject, comprising securities (synonym for financial assets);
operators, consisted by intermediaries: legal entities (for example, securities companies in Romania); authorized
individuals (for example, agents of financial investment services and stock brokers); specialists (market-makers);
operations, which, in logical comprehension, form a set of activities, called transactions or investment.

3. Types of Capital Markets.

There are two types of capital market: Primary market and Secondary market.
Primary market

 It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term
capital.
This market is concerned with new issues.
Therefore, the primary market is also called NEW ISSUE MARKET.
Secondary Market

The secondary market is that market in which the buying and selling of the previously issued securities is done.

A market where securities are traded after being initially offered to the public in the primary market and/or listed
in the stock exchange.

The transactions of the secondary market are generally done through the medium of stock exchange.

If an individual has bought some security and he now wants to sell it, he can do so through the medium of stock
exchange to sell or purchase through the medium of stock exchange requires the services of the broker presently.
Secondary Market
Majority of the trading is done in the secondary market. This market comprises of Equity market and Debt
Market.
Secondary market provides liquidity to the securities on the exchange(s) and this activity commences subsequent
to the original issue

4. Features of Primary Market

This is the market for new long term capital. The primary market is the market where the securities are sold for
the first time. Therefore it is also called New Issue Market (NIM).

In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issue new security certificates to the investors.

It has no particular place.

The primary market performs the crucial function of facilitating capital formation in the economy.

The new issue market does not include certain other sources of new long term external finance, such as loans
from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital
into public capital; this is known as going public.

5. Features of Secondary Market

It Comes After Primary Market
Help in determining fair prices based on demand and supply forces and all available information
Provides easy marketability and liquidity for investors
It Encourage New Investments

 Enabling investors to adjust portfolios of securities

It Has A Particular Place

6. Participants in the Secondary Market

Stock Exchange

Clearing Corporation
Depositories/ DP
Trading Member (Stock Broker)/ Clearing Member
Registrar to an Issue and Share Transfer Agent

7. Supply and demand on capital Market

The demand of capital :
is generated from several major categories of economic agents, such as:
State and local authorities whose main motivation for applying for funding is the financing of budgetary deficit
costs, which appear on market by issuing bonds.
State companies that require the available funds for own investment needs in different sectors of economy.
Private business entities, which are calling on the capital market both within the process of their creation and
during the development of business by issuing shares to finance the equity capital, and bonds to finance the loan
capital.
Financial companies, including banks, that use investors' funds to finance their assets, and their primary role is to
facilitate the circulation of capital, thus, ensuring the financial market liquidity.

8. Significance and Role of Capital Market

Like the money market capital market is also very important. It plays a significant role in the national economy.
A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and
development.
These markets channel the wealth of savers to those who can put it to long-term productive use, such as
companies or governments making long-term investments
Let us get acquainted with the important functions and role of the capital market.
Mobilization Of Saving

Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from
people for further investments in the productive channels of an economy. In that sense it activate the ideal
monetary resources and puts them in proper investments.

Capital Formation

Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy.
Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various
segments such as agriculture, industry, etc.
Provision of Investment Avenue
Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to
invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as
bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the
public.
Speed up Economic Growth and Development
Capital market enhances production and productivity in the national economy.
As it makes funds available for long period of time, the financial requirements of business houses are met by the capital
market. This helps in, increasing production and productivity in economy by generation of employment and development
of infrastructure.
Service Provision
As an important financial set up capital market provides various types of services. It includes long term and medium term
loans to industry, underwriting services, consultancy services, export finance, etc.
These services help the manufacturing sector in a large spectrum.
Continuous Availability of Funds
Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid
market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are
continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the
capital market becomes easy.

9. Capital market instruments

Capital market instruments are responsible for generating funds for companies, corporations and
sometimes national governments. These are used by the investors to make a profit out of their respective
markets.
There are a number of capital market instruments used for market trade, including: Stocks, Bonds,
Debentures, Treasury-bills, Foreign Exchange, Fixed deposits, and others.

10. Bonds as debt instruments

Definition :
Bond is a security issued in connection with a borrowing arrangements which obligates the issuer to make specific
payments (coupon payments) to the holder over a period of time usually semi-annually).
Bonds generally fall under:
Corporate Bonds/Debenture.
Government Bonds

 Federal Government Bonds

State Government Bonds
Local Government Bonds
Municipal Bonds/Notes
Background on Bonds:
Convertible bond: a bond that can be converted into a stated number of shares of the issuers stock if the
stock price reaches a specified price
These bonds tend to offer a slightly lower return
A bonds yield to maturity: the annualized return on a bond if it is held to maturity
If a bond sells at par value, its yield to maturity equals the coupon rate
If a bond sells below par value, its yield to maturity would exceed the coupon rate
If a bond sells above par value, its yield to maturity would be less than the coupon rate
Bonds trading in the secondary market
Investors sell their bonds to other investors before they reach maturity
Bond prices change in response to interest rates
Brokerage firms also take orders to buy
or sell bonds

11.Types of Bonds
Treasury bonds: long-term debt securities issued by the Treasury
Payments guaranteed by government
Interest is subject to federal income tax, but exempt from state and local taxes
Can easily be sold in the secondary market
Municipal bonds: long-term debt securities issued by state and local government agencies
Low risk
Interest exempt from federal income tax
Federal agency bonds: long-term debt securities issued by federal agencies
Low default risk
Interest is taxable
Corporate bonds: long-term debt securities issued by large firms

 Subject to default risk

High-yield (junk) bonds: bonds issued by smaller, less stable corporations that are subject to a higher
degree of default risk
Corporate bonds
Corporate bonds are often structured similarly to T-bonds: they tend to pay a semiannual coupon and return face
value at maturity.
Firms may deduct the interest payments from their taxes.
Some corporate bonds are secured, meaning that they are backed by collateral.
Subordinated debentures have a lower priority than other debt in case of bankruptcy.
Corporate bonds are often issued with options attached that allow for early calling of the bond or conversion to
equity.
Corporate financing
The size of the corporate bond market is significantly smaller than the size of the stock market.
However, the volume of new corporate bonds issued each year is much larger than new stock issues.
Thus, the corporate bond market may not be the most important for asset pricing, but it is pivotal for corporate
finance and is a key measure of financial health in the economy.

12.Risk and return from Investing in Bonds

Return from Investing in Bonds

Impact of interest rate movements on bond returns

If interest rates rise, the value of your bond decreases
If interest rates fall, the value of your bond increases
Comparison of actual returns among bonds
Varies among types of bonds and among holding periods
Tax implications of investing in bonds
Interest is taxed as ordinary income (unless tax exempt)
Selling bonds at a price higher than you paid also results in a capital gain
Risk from Investing in Bonds
Default risk: risk that the borrower of funds will not repay the creditors
Risk premium: the extra yield required by investors to compensate for the risk of default
Use of risk ratings to measure the default risk

 Ratings reflect likelihood that issuers will repay their debt over time
Relationship of risk rating to risk premium
The lower the risk rating, the higher the risk premium offered on a bond
Impact of economic conditions
Higher risk of default when economic conditions are weak
Focus on Ethics: Accounting fraud and default risk
Prices of bonds issued by a firm with questionable financial statements can decline quickly
Securities and Exchange Commission is to ensure accuracy of a firms financial statements
Call (prepayment) risk: the risk that a callable bond will be called
Interest rate risk: the risk that a bonds price will decline in response to an increase in interest rates
Impact of a bonds maturity on its interest rate risk
Bonds with longer terms more sensitive to interest rate movements
Selecting an appropriate bond maturity
Choose maturities that reflect your expectations of future interest rates
Consider investing in bonds that have a maturity that matches the time you will need the funds

13.Stocks as equity instruments

Stocks are equity claims on the net income and assets of a corporation. The two defining features of a stock is that
it is a residual claim with limited liability.
Stockholders have a junior claim on the assets and income of the firm. Namely, they receive whatever is left over
after all other claimants (suppliers, tax collectors, creditors, etc.) have been paid. The firm can pay out the residual
as dividends or reinvest it in the firm which increases the value of the shares.
Limited liability means that shareholders are not accountable for a firms obligations. Losses are limited to the
original investment. (Compare this to unincorporated businesses where owners are personally liable.)
Types of stock
There are two types of stock.
Common stock is a simple equity claim. It may or may not have voting rights.
Preferred stock is a hybrid of equity and debt. Like debt, it has no voting rights.
If no specification is made, stock typically refers to common stock, a pure equity claim.

1. Preferred Stock:
These are non-voting shares in a company, usually paying a fixed stream of dividends.

 Preferred stock is often referred to as a hybrid security because it has many characteristics of both common stock
and bonds.
Hybrid nature of Preferred stocks :
Like common stocks, preferred stocks
Have no fixed maturity date
Failure to pay dividends does not lead to bankruptcy
Dividends are not a tax-deductible expense
Like Bonds
Dividends are fixed in amount (either as a $ amount or as a % of par value)

14.Basic characteristics of preferred stock

Multiple series of preferred stock
Preferred stocks claim on assets and income
Cumulative dividends
Protective provisions
Convertibility
Retirement Features
Multiple Series
If a company desires, it can issue more than one series of preferred stock, and each series can have different
characteristics (such as different protective provisions and convertibility rights).
Claim on Assets and Income
Claim on Assets: Preferred stock has priority over common stock with regard to claim on assets in the case of
bankruptcy.
Preferred stockholders claims are honored before common stockholders, but after bonds.
Claim on Income: Preferred stock also has priority over common stock with regard to dividend payments.
Thus preferred stocks are safer than common stock but riskier than bonds.
Cumulative Dividends
Cumulative feature (if it exists) requires that all past, unpaid preferred stock dividends be paid before any
common stock dividends are declared.
Protective Provisions

 Protective provisions generally allow for voting rights in the event of nonpayment of dividends, or they restrict
the payment of common stock dividends if sinking-funds payments are not met or if the firm is in financial
difficulty.
Convertibility
Convertible preferred stock can, at the discretion of the holder, be converted into a predetermined number of
shares of common stock.
Almost one-third of preferred stock issued today is convertible preferred.
Retirement Features
Although preferred stock has no set maturity associated with it, issuing firms generally provide for some method
of retiring the stock such as a call provision or sinking fund provision.
Call provision entitles the corporation to repurchase its preferred stock at stated prices over a given time
period.
Sinking fund provision requires the firm to set aside an amount of money for the retirement of its
preferred stock.

15. Basic characteristics of common stock.

Common stock is a certificate that indicates ownership in a corporation. When you buy a share, you buy a
part/share of the company and attain ownership rights in proportion to your share of the company.
Common stockholders are the true owners of the firm. Bondholders and preferred stock holders can be viewed as
creditors.
Features of Common Stocks:
Claim on income
Claim on assets
Voting rights
Preemptive rights
Claim on Income
Common shareholders have the right to residual income after bondholders and preferred stockholders have been
paid.
Residual income can be paid in the form of dividends or retained within the firm and reinvested in the business.
Claim on residual income implies there is no upper limit on income, but it also means that on the downside,
shareholders are not guaranteed anything and may have to settle for zero income in some years.
Claim on Assets
Common stock has a residual claim on assets in the case of liquidation.

 Residual claim implies that the claims of debt holders and preferred stockholders have to be met prior to
common stockholders.
Generally, if bankruptcy occurs, claims of the common shareholders are typically not satisfied.
Voting Rights
Most often, common stockholders are the only security holders with a vote.
Majority of shareholders generally vote by proxy. Proxy fights are battles between rival groups for proxy
votes.
Common shareholders are entitled to:
elect the board of directors
approve any change in the corporate charter
Voting Rights
Voting for directors and charter changes occur at the corporations annual meeting.
With majority voting each share of stock allows the shareholder one vote. Each position on the board is
voted on separately.
With cumulative voting - each share of stock allows the stockholder a number of votes equal to the
number of directors being elected.
Voting for Board of Directors
In the real world, shareholders do not really pick the board rather they simply select from a list of nominees
chosen by the management.
This opens the door for management favored boards, which may not be in the best interest of shareholders.
Preemptive Rights
Preemptive right entitles the common shareholder to maintain a proportionate share of ownership in the firm.
Thus, if a shareholder currently owns 5% of the shares, s/he has the right to purchase 5% of the shares
when new shares are issued.
These rights are issued in the form of certificates that give shareholders the option to buy new shares at a specific
price during a 2- to 10- week period. These rights can be exercised, sold in the open market, or allowed to expire.

16. Benefits of Investing in Equities

An investor derives the following benefits:
Participate in the fortunes of the company through dividends -which forms part of the companys profit
Growth in portfolio through bonus shares extra shares fully paid out of reserves which are distributed to existing
shareholders

 Growth in portfolio through capital appreciation i.e. as market prices of equities increases
Right to attend and vote at shareholders meetings
Use of share certificate as collateral for borrowings
The feeling of satisfaction in contributing to business and economic growth

17. Derivatives as capital market instruments

A derivative is a financial instrument whose value derives from the value of something else.

This agreement is a derivative.

Basic purpose are:

In derivatives transactions, one partys loss is always another partys gain

The main purpose of derivatives is to transfer risk from one person or firm to another, that is, to provide
insurance

If a farmer before planting can guarantee a certain price he will receive, he is more likely to plant

Derivatives improve overall performance of the economy

A derivative is a financial instrument whose value derives from the value of something else, generally called the
underlying(s).

Underlying: a barrel of oil, a financial asset, an interest rate, the temperature at a specified location.

18. Types of Derivatives

There are two distinct but ultimately related markets for derivatives. Derivatives may be:
Exchange traded contracts: which have standard terms and features and are traded on an organized trading
facility/exchange such as a futures exchange or an options exchange.
Over-the-counter contracts: which are transactions created by two parties but not traded on an exchange and usually
representing a private deal vis a vis an underlying. This could be a wide array of deals including purchasing of
insurance.

19. Forms of Derivatives

There are two distinct forms of derivatives. Derivatives may be:
Forward commitments: which are agreements between two parties in which one party agrees to buy from the other party
an underlying asset at a future date at a price established at the start.
Contingent claims: which are derivatives in which the payoff occurs if a specific event occurs. We generally call these
types of claims as options.
Forward commitments come in three categories:
Forward contracts or Forwards: This is a forward commitment in which the two parties privately design and therefore
customize the deal. The underlying could be anything

Swaps: which are a variation of a forward contract (actually it is simply a series of forward contracts) in which the parties
agree to swap a series of future cash flows. Generally at least one cash flows value is determined by a later outcome
Futures contracts: which are a variation of a forward commitment that is a public, exchange-traded, standardized
transaction the protection re the default on which is guaranteed by the exchange. Futures are available on a wide range of
commodities, currencies, stocks, funds, etc.

20. Purpose of using of derivatives

In derivatives transactions, one partys loss is always another partys gain

The main purpose of derivatives is to transfer risk from one person or firm to another, that is, to provide
insurance

If a farmer before planting can guarantee a certain price he will receive, he is more likely to plant

Derivatives improve overall performance of the economy

Derivatives can be used by individuals, corporations, financial institutions, and governments to reduce a risk
exposure or to increase a risk exposure.

21. Traders of derivatives

Hedgers or Hedging : If someone bears an economic risk and uses the futures market to reduce that risk, the
person is a hedger. Hedging is a prudent business practice and a prudent manager has a legal duty to understand
and use the futures market hedging mechanism

Speculators or Speculation: A person or firm who accepts the risk the hedger does not want to take is a speculator.
Speculators believe the potential return outweighs the risk. The primary purpose of derivatives markets is not
speculation. Rather, they permit the transfer of risk between market participants as they desire

Arbitrageurs: Arbitrage is the existence of a riskless profit. Arbitrage opportunities are quickly exploited and
eliminated. Persons actively engaged in seeking out minor pricing discrepancies are called arbitrageurs.
Arbitrageurs keep prices in the marketplace efficient. An efficient market is one in which securities are priced in
accordance with their perceived level of risk and their potential return

22. Transactions with derivatives on international capital market.

Futures, options and swap markets are very useful, perhaps even essential, parts of the financial system

hedging or risk management

speculate or strive for enhanced returns

price discovery - insight into future prices of commodities

Futures and options markets, and more recently swap markets have a long history of being misunderstood -

Derivatives somehow allow investors to better control the level of risk that they bear.

They can help eliminate diversifiable risk.

They can decrease or increase the level of systematic risk.

23. Factors that fuel the growth in derivatives on international capital markets

Change in volatility in markets

Exchange rates became floating

Active control of interest rates

Commodity prices

Globalization

Revenues in different currencies

Operating Costs in different currencies

Liabilities in different currencies

Technological advances

Level of computerization

Modeling abilities

Regulatory changes

Changes in transactions costs

24.The basic characteristics of Derivative Instruments

1. The instrument has one or more underlyings and and identified payment
provision.
An underlying is a specified stock price, interest rate, commodity price, index of prices or rates,
or other market-related variable.
The interaction of the underlying, with the face amount or the number of units specified in the
derivative contract (the notional amounts), determines payment.
Example:
The underlying is the stock price of Laredo stocks.
The value of the call option increased in value when the value of the Laredo stock increased.
Payment Provision = Change in the stock price x Number of Shares
2. The instrument requires little or no investment at the inception of the contract.
Example:
The company paid a small premium to purchase the call option an amount much less than if purchasing the Laredo
shares as a direct investment.
3. The instrument requires or permits net settlement.
Example:
The Laredo stock Call Option allows the company to realize a profit on the call option without taking possession of the
shares.

This Net Settlement feature reduces the transaction costs associated with derivatives.

25. The international stock exchange market

The Stock Exchange is a place where debt and equity securities of varying types are traded
transparently.
It is a market that facilitates capital mobilization and allocation, as both governments and companies can raise funds
through the market on long and most prudent terms through the offer of shares (by companies) and bonds (by companies
and governments).
The facility, which the stock exchange provides for trading in existing securities, removes the restriction that would have
prevented individuals from investing their savings in securities.
The opportunity it offers for subsequent trading in existing securities has made it a decisive factor in the success or
otherwise of many corporate issues
According to the classical approach, the stock exchange supposes the existence of an institution which disposes
places for transactions, where the demand and supply for securities are concentrated, and negotiation, conclusion,
and open execution of contracts are performed, according to a known regulation.
Another approach reduces the stock exchange concept to a specialized and organized market which functions
under the control and supervision of the state through competent bodies.
Various types of securities (primary securities and derivatives) can be sold and bought on the stock exchange

26. The Stock Exchange framework

The stock exchange is a component of the secondary capital market, whose activity is based on public
regulations, and where listed securities are negotiated.

The stock exchange is an institution which disposes spaces organized for transactions performance, where the
demand and supply for commodities and securities are concentrated, leading, on the basis of negotiations, to the
conclusion of transactions and execution of contracts transparently, on the basis of known and accepted rules.

27. specific features of the stock exchange

The stock exchange is a public market;

This feature makes it substantially different from the transactions, which can be performed between private companies
(banks, investors etc.) on the primary market, or between physical persons who can negotiate between them and can
terminate the transaction according to particular rules.
The stock exchange is a regulated market;
The transactions performed on the stock exchanges are of great importance for the entire economy, which sights both
public and private economy. This kind of transactions can render really strong effects on the economic life and over the
financial credibility of issuers, and, thus, can not be left to the free activity of participants. These transactions make the
object of precise regulations, including:
- the way of establishing and publishing market prices;
- the means of control on keeping the regulations;

- sanctions (truly severe) on the detected irregularities.

The stock exchange is one of the most important institutions of a market economy.
The stock exchange is a segment of the financial market, an organized secondary market, transparent and supervised,
where there are performed transactions on securities, their derivatives, currency.

28. Main functions of the stock exchange

Concentration of demand and supply of securities in a certain place and at a certain moment of time, thus being
accomplished a direct link between the owners of disposable capital and financing necessities of economic agents,
state, public authorities etc.;

Performance of transactions with securities, according to the customers orders and with respect to the
exchanges regulations, offering the possibility to transform the securities held into cash;
Reflection of the market condition at the moment for the economic space which it represents;
Continuous and systematic observation of the securities market price, which, by means of the trading price at a
given moment, supplies information on the market values of the securities issuing companies.

29. The role of the stock exchanges from the issuers point of view

The role of stock exchanges is extremely complex, basically ensuring a free and intense circulation of capital
and securities, at a price which reflects directly the interest of market participants.

From the issuers point of view, stock exchanges permit the access to own and borrowed capital, which can be
obtained by means of securities issue (shares or bonds).

30. The role of the stock exchanges from the investors point of view

31.

From the investors and securities holders point of view, stock exchanges provide a way to obtain higher
returns on disposable cash or represent a way of obtaining cash by means of sale of the securities held within the
portfolio.

The classification of Stock exchanges

according to the form of organization, there can be distinguished:

State (public) exchanges which, at the moment of their foundation, imply the intervention of bodies of public
administration. State stock exchanges are non-profit institutions, organized and managed by the state. Usually, these
provide free access for any intermediary, who meets the conditions set by the regulations in force. In case of non-profit
exchanges, their members do not receive dividends on invested capital. These investors obtain their profit through the
activity of brokerage agencies they own;
Private exchanges, which appeared exclusively on private initiative. Private exchanges are non-profit institutions (for
example, US stock exchange, NYSE, TSE) or for-profit institutions (for example, stock exchanges in Great Britain,
Germany). The access is limited to a certain number of places (members), the first condition for an intermediary who
wants to participate in the respective market being the ownership of a place for trading. For-profit exchanges provide to its
associate members the possibility to receive dividends on the invested capital;
Mixed exchanges both public, as well as private (for example, exchanges in Switzerland).

 according to the object of transaction, there are:

General exchanges, where operations with various commodities, securities, currencies are negotiated;
Specialized exchanges, where transactions on a determined range of commodities or only on securities take place;
according to the number of members (the criterion of participants admission) there can be:
Closed exchanges, where the number of founder members is limited. The affiliation (for a new member) can be achieved
only by exchange (with an old member), by inheritance, purchase or rental. The access to the stock exchange is granted
only to its members or to those who obtained the authorization from the exchanges governing body;
Opened exchanges, where the amount of members can be supplemented by a certain proportion. The participation on the
exchange is unlimited under the condition of internal legal frames keeping. The access might be either free or charged
with an attendance fee;
according to the way of communication for transactions conclusion, there are:
Open outcry exchanges, where transactions are concluded vocally, being the oldest way of communication;
Electronic exchanges, where transactions are performed by means of modern communication technologies (telephone,
fax, internet);
according to the way of price formation, exchanges can be classified as follows:
Auction exchanges, which presume the presence of a specialist who holds the trading session, the most characteristic
being the fact that at a certain given moment, for a certain security, just one single price can exist at the transactions
conclusion;
Negotiation exchanges, where, at the moment of price formation, direct negotiations between participants are used, the
main peculiarity being the fact that at a certain moment of time, for the same security several transaction conclusion prices
can exist, due to the possibility of existence of several simultaneous negotiations for the respective security;
according to legal form of organization, there are:
organized (official) stock exchange, which is the exchange where securities admitted to listing are negotiated.
Operations are carried within a specially equipped space as per a functioning regulation. Transactions are
centralized and available for continuous informing of the clients. Operations are performed exclusively within a
mechanism, implying personnel that are specialized in transactions negotiating, and technical staff that are in
charge of preparing negotiations, contracts evidence, and pursue their accomplishment.

32. Listing on Stock exchange requirements and Benefits of listing

A security must pass a series of distinct stages:
introduction on the market;
launching the bid / offer orders;
current sales price formation;
execution of delivery and liquidation operations.
The listed securities are issued on the primary market and later traded on the exchange.

The procedure of admission to listing, besides a lot of other close conditions, differs considerably from one country to
another or from one exchange to another.
The Regulation of the stock exchange, generally, comprises specific provisions regarding:
Securities listing (admission, listing conditions, information to be supplied regarding national or foreign
securities)
Trading mechanism (types of transactions performed, negotiation procedure, way of formation and display of the
market price)
Stock exchange agents activity.
Listing requirements:
There are specific requirements for allowing a public company to list its securities on the Stock Exchange these
are set out in the legislation
To apply for listing, companies have to meet certain minimum requirements with respect to

The number of shareholders

Trading activity

The number and value of shares held in public hands

Annual earnings

An initial listing fee, as well as annual listing fees, is charged based on the number of shares.
Benefits of listing:

Visibility

Market support

Investors confidence

Increased demand for products and services

Overall increase in profitability

Stock exchange can delist companies for a number of reasons including :

Merger with another company

Solvency problems

Name change company asked to be removed

Failure to comply with exchange rules

33. Stock exchange members and agents

Entities, who associate to found a stock exchange, become members of the exchange, quality that invests to them
certain rights and obligations.

Exchanges members (exclusively) have the right to perform direct transactions with securities.
Exchange agents represent a category of professional participants on the exchange whose role is to conclude and
perform transactions with securities, while investors do not meet directly within negotiations.
According to performed activity, stock exchange agents can be considered:
a) Operative specialists who directly perform stock exchange transactions, and can be grouped into:

brokers (stock exchange agents) or stock exchange intermediaries;

dealers (stock exchange traders).

Non-operative specialists. Their role is to perform different studies or analysis with the scope to render information to
clients on investment juncture and opportunities. This category includes: financial analysts, stock exchange personnel
engaged to supervise, control, and follow specific operations that take place on the trading floor, or who are occupied with
transmission of information and preparing the documents.

People who buy or sell stock on an exchange do so through a broker

The broker takes your order to the floor of the exchange looks for a broker representing someone
wanting to buy/sell

If a mutually agreeable price is found the trade is made

34. Stock exchange market orders

A stock order is a clear instruction, given by an economic operator who desires to sell / buy
securities, given to an exchange agency, in written form, by telex, telegram, phone or verbally,
within an exchange session, under the condition of its written confirmation.

Limit order

Market order

Day order

Open

All or none

Any part

Good through

35. Stock exchange indexes: definition

An Index is a numerical value used to measure changes in a variable or group of variables.
The Stock Market Index is a specialized tool used essentially to capture the overall performance of the stock
market.

 An index can also be employed to measure how well a given equity or bond portfolio is performing.
If an investor owns more than one stock, it is cumbersome to follow each stock individually to determine the
composite performance of the portfolio.
Hence, to supply investors with a composite report on market performance, some investment firms have
developed stock market indexes.
Indexes generally enhance and support the business of stockbrokers, investment banks, analysts and the financial
press.
36.

Significance of the stock exchange indexes on the capital market

The stock market index can be defined as a measure of the value dynamics of a stock market, as a whole, or of
a certain sector (industrial or services).

At the same time, the stock market index is a synthetic instrument which reflects, first of all, the evolution of
prices of securities that belong to companies listed and selected to be taken into account.
So, It is a comprehensive measure of market trends indicating the general stock market price movements.
Thus, the index will be the investors yardstick for the level of the whole stock market, or a certain group of
stocks, against which the performance of individual stocks/portfolio can be measured or judged.
Stock market indexes are global instruments used by investors in developed as well as developing markets.
Indices resulted from the investors and analysts necessity to be able to characterize rapidly and as a whole a
stock exchange or one of its sectors. Furthermore, the relative form of the index permits comparisons in time to be
made, comparisons that can not be affected by inflation.
Usually, indexes are constructed with a particular objective in mind and they differ with respect to the stocks
included in the basket, method of weighting and the procedure for computation.
Also, there are equity and bond indexes.
The index measures the moves up or down of stocks or bonds or funds etc. reflecting market price and market
direction.

37. Types of Stock Market Indexes

Depending on how the index is calculated:
For a value-weighted index (i.e., the S&P 500), companies with larger market values have higher weights.
For a price-weighted index (i.e., the DJIA), higher priced stocks receive higher weights.
According to the type of market, for which indexes are computed:
Indexes for stock exchanges (S&P 200, BET);
Indexes for over-the-counter markets (NASDAQ 100).
Indexes can be either broad or sample-based.
Broad based indexes are composed of a large number of stocks with the objective of reflecting movements in
large or generalized markets.

 Sample-based indexes are composed of smaller numbers of stocks and have the objective of reflecting
movements in small or focused markets.
The assumption is that a small percentage of the total population will provide valid indications of the behaviour
of the total population if the sample is properly selected.

38. Broad-based Indexes: characteristics and examples

Notable Examples of Broad-based Indexes are:
Standard and Poors Indexes
American Stock Exchange Index
New York Stock Exchange Index
Dow Jones Equity Market Index
Wilshire 5000 Equity Index
NASDAQ Series
The Russell Indexes
Tokyo Stock Exchange price Index (TOPIX)
Nigerian Stock Exchange Index
39.

Sample-based Indexes: features and examples

The notable feature of the available sample indexes is that they are composed of all the highly capitalized and
perhaps the most profitable companies spread across key sectors of the economy.

Few samples were concentrated on because; over time analysis has shown that about 50 equities accounted for
between 89 94 per cent of the total market capitalization.
By concentrating on only a carefully selected sample, analysts are able to study performance and make valid
predictions on the overall market.
The results obtained will be comparable to that obtained by taking higher sample or the entire market.
Notable examples of Sample-based indexes are:
Nikkei Stock Average Index also referred to as the Nikkei-Dow Jones Average based in Japan utilizing 225 of the
stocks listed on the First Section of the Tokyo Stock Exchange (TSE). Also price-weighted and is the most well
known series in Japan.
CAC based in France and composed of 40 liquid blue chip stocks
The FT-SE 100 (The Footsie) based in UK initiated in 1984
The FT-SE Mid 250 based in UK introduced in 1992
The Listing on any major sample-based index is regarded as a status symbol, which strengthens corporate image, and
improves access to funds.

 The most widely followed barometer of day-to-day stock market activity is the Dow Jones Industrial Average
(DJIA), or Dow for short.
Dow Jones Industrial Average composed of 30 large, well known industrial stocks that are the leaders in their
industry (blue chips) and are listed on the NYSE.
This is the oldest and most popular stock market index. The index is price-weighted; hence a higher priced stock
carries more weight than a low-priced stock.

40. Global (international) Indexes

offer a base for analysing the global stock market
MSCI World Index - Morgan Stanley Capital International index is based on quotations of 1477 stocks,
representing nearly 60% of the total value of markets from 20 countries.
FT-Actuaries World Index is an aggregate of national and regional indexes, being represented by 2400 individual
securities that are globaly investable".

Salomon-Russell Global Equity Index

S&P Global 1200 is Standard & Poor's Global Index and it covers seven main regions of the world and 29
countries. It is calculated as a reunion of some indexes calculated by Standard & Poor's wolrdwide.

41. Importance of Stock Index for capital market functioning

The Index Summarizes the Entire Market: The market capitalization figures runs into trillions, while index
figures are shorter.

To Measure Market Performance: A primary application is to obtain total returns for the entire market or some
component of it over specified time period and apply the rates of return computed as a benchmark to judge the
performance of individual portfolio managers.
For Performance Benchmarking: It is now a normal practice for fund managers to use indexes as benchmarks for
evaluating their portfolio.
To Develop Indexed Portfolio: In active and developed stock markets, it is usually difficult for fund managers to
consistently outperform specified market indices. As an alternative, fund managers invest in a portfolio that will
emulate this market portfolio. The obvious alternative is to invest in a portfolio that would emulate the market
portfolio.
This led to the creation of index funds whose purpose is to track the performance of the specified index over time and
derive similar rates of return
Marketing Instruments: International investors can compare the performance of the countrys index to other
indices around the world.
To Forecast: This is based on the belief that past price changes can be used to predict future price movements.
Prices of companies represented in the index are equivalent to the present value of future cash flows. If future
cash flows are expected to change (increase or decrease), the index will reflect these expectations.
For Inter-Country Comparisons: Indexes are used to analyze events and returns in the stock and bond markets of
different countries.

 Allows for Self-Regulating Markets: With indices, arbitrageurs can easily identify discrepancies in the market
and correct the market to ensure that prices are accurate.

42. Main characteristics of USA Capital Market

In the Eurobond market, corporations and governments typically issue bonds denominated in dollars and sell
them to investors located outside the United States.

The foreign bond market is a market for bonds issued by a foreign corporation or government that is
denominated in the investors home currency and sold in the investors home market.

The international equity market allows corporations to sell blocks of shares to investors in a number of different
countries simultaneously.

43. Main characteristics of Japan Capital Market

Main stock exchanges in Japan:

Tokyo Stock Exchange, Inc.

Osaka Securities Exchange Co., Ltd.

JASDAQ Securities Exchange,Inc.

Nagoya Stock Exchange, Inc

Fukuoka Stock Exchange

Sapporo Securities Exchange

Tokyo Stock Exchange (TSE)

It is the third largest stock exchange in the world by aggregate market capitalization of its listed companies. It had
2,292 listed companies with a combined market capitalization of US$4.5 trillion as of November 2013.

Largest of the eight exchanges in Japan

Dominates Japanese market

Established in 1878 and reorganized in 1943, 1947, and 1949

44. Main characteristics of European Capital Market

There are two major pan-European stock exchanges:

Euronext, which is headquartered in Amsterdam and was formed from stock exchanges in Belgium, France, the
Netherlands and Portugal and is the second-largest stock market in Europe (and with the New York Stock
Exchange, forms the first global exchange);

NYSE Euronext (pan-European stock exchange with subsidiaries in Belgium, France, Netherlands, Luxembourg, Portugal
and the UK; include the New York Stock Exchange, Euronext, Liffe, and NYSE Arca Options)

OMX Nordic Exchange part of NASDAQ OMX Group, serves as a central gateway to the Nordic and Baltic
financial markets:

Nordic Market , composed of bourses in Sweden, Denmark, Finland and Iceland with activity in Norway
and the Faroe Islands;

Baltic Market , composed of bourses in Estonia, Latvia and Lithuania;

First North, an alternative exchange based in Stockholm, Sweden.

There are different levels of stock exchanges in European countries:

national level, for example, Cyprus Stock Exchange or Brse Berlin-Bremen (merger of the Berlin and Bremen
Stock Exchanges)

mixed national / regional as is the case of EUREX established on 1998 as a joint venture between Deutsche
Brse and the Swiss Exchange

regional EURONEXT - merger of the Amsterdam, Brussels, Lisbon, and Paris exchanges or OMHEX (merger
of OM [Sweden] and HEX [Finland])

New Trends :

Recent proposals refer to the fact to deliver a capital markets union; a project for all 28 EU Member States.

A capital markets union would mean the EU moving beyond public subsidies and loans to coordinate financing
for companies and infrastructure through project bonds, public-private partnerships and infrastructure funds.

The European Central Bank is at the heart of wider efforts to create a capital markets union by trying to revive
securitisation, or the bundling of loans into bonds to raise cash for companies to invest.

45. Main trends on international Capital Market

Raise in the level of foreign investment, Continued growth of global financial assets and
Regulation of International Securities Market in Asia have collectively had an impact on capital
markets and cross border trade.
Raising capital becomes a real challenge for corporate around the world due to uncertainty in the global economy. To
identify the financial instruments which are most conducive in raising the capital and gauging the dynamics of financial
markets is imperative. Struggling credit markets, slumping stocks, and a sliding dollar have been generating anxiety
among policy makers and since 2008. The global market had many fluctuations such as the 1987 U.S. stock market
crash, the fall of British pound in 1992 and the unravelling of Asias financial markets. A recent research by Mckinsey
Global Institute (MGI) research has highlighted several trends that look set to continue during the years ahead. The
continued growth and deepening of global markets as investors pour money into equities, securities, bank deposits and
other assets around the world on one hand and the growth of financial markets, especially in emerging economies and the
growing ties between financial markets in developing and developed countries. Also, the shift of financial weight in Asia
from Japan to other developing economies across Asia will have an impact on capital markets of these countries.
Continued growth of global financial assets
The volume of global financial assets such as government debt securities, corporate debt securities and equity securities
will continue to expand. In the last 25 years the financial assets have grown robustly. However bank deposits have
reduced drastically. The past few years have seen the bank deposits see a jump of over $ 5.6 million, with significant
contributions from United States.
Depth of financial markets
Financial markets have been growing faster than the global GDP over the years. Due to this the ratio of a countrys
financial assets to GDP has been rising constantly over the past few years. In 1990, only 33 countries had financial assets
whose value exceeded the value of their GDPs. By 2006, this figure had more than doubled to 72 countries. Brazil, China,
India are some of the few countries whose financial assets have outnumbered the countrys Gross National Product
(GNP).

Raise in the level of foreign investment

The raise in the level of investment is making the world more financially interdependent than it was a few years ago. By
the end of 2006, it was around $ 74.5 trillion of assets.
Regulation of International Securities Market
The worlds capital markets have continued to undergo dynamic changes, both in terms of structure and complexity. The
huge achievements in information and telecommunication technologies have virtually eliminated the boundaries between
capital markets of different nations. The regulatory structure of the U.S. Financial system, which was created as a
response to the Great Depression and the 1929 stock market crash was designed with a national market in mind. The
global nature of modern capital markets frequently means that new regulations are imposed in one jurisdiction may have
legal and market effects in the other. Cross border fraud poses significant difficulties and challenges to security regulators
whose legal powers stop at their own national borders although their jurisdictions stretch globally. Although markets are
now global, regulation remains local, cross border co-operation between financial regulators for the purpose of regulation
and enforcement has become a necessity. The International Capital Market Association is also promoting the
international capital market by maintaining the framework required for cross border issuing, trading and investing through
the development internationally accepted market practices and acting as an intermediary between the governments,
regulators, central banks and stock exchanges, both at national and international level, to ensure that financial regulation
promotes the efficiency and cost effectiveness of the international capital market.
- See more at: http://www.internationalfinancemagazine.com/article/Recent-Trends-in-Global-CapitalMarkets1.html#sthash.IFvtIKKN.dpuf