Capital Markets

Capital Market
• A market in which individuals and institutions trade financial
securities. Organizations/institutions in the public and private sectors
also often sell securities on the capital markets in order to raise funds.
• Thus, this type of market is composed of both the primary and
secondary markets.
• Capital markets are financial markets for the buying and selling of
long-term debt- or equity-backed securities.
• 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.
Capital Market
• Capital Market is where trading in financial instruments is conducted
to raise capital.
• Three (I’s) categories of participants:
1. Issuer of securities: Borrowers or deficit savers who issue securities to raise
funds(corporate sector, central government).
2. Investors: Surplus savers who deploy savings by subscribing to these
securities(include retail investors, mutual funds).
3. The Intermediaries: Agents who match the need of the users and suppliers
of funds.
Nature Of Capital Market
• The nature of capital market is brought out by the Following facts:
• Its has two segments primary and secondary market.
• It performs trade-off function.
• It deals in long-term securities.
• It helps in creating liquidity.
• It creates dispersion in business ownership.
• It helps in capital function.
Role and Function of Capital Market
• Capital Formation
• Avenue Provision of Investment
• Speed up Economic Growth and Development
• Mobilization of Savings
• Proper Regulation of Funds
• Service Provision
• Continuous Availability of Funds
Factors affect the Capital Market
• Economy of the Country
• Money Supply
• Interest Rate
• Corporate Results
• Global Capital Market Scenario
• Foreign Funds Inflow
• Strength/Weakness of the local currency
Types of capital market
• There are two types of capital market:
1. Primary market
2. 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:
• It refers to a market where securities are traded after being initially offered to the
public in the primary market and/or listed on the stock exchange.
• Secondary market comprises of Equity market and Debt market
Classification of Capital Marketing

CAPITAL MARKET

PRIMARY SECONDARY
MARKET MARKET

PUBLIC RIGHT BONUS PRIVATE STOCK

ISSUE ISSUE ISSUE PLACEMENT MARKET
Primary Market
• In Primary Market, Securities are offered to the public for subscription, for the
purpose of raising the capital or funds.
• The issue of securities in the primary market is subjected to fulfillment of a
number of pre-issue guidelines by SEBI and compliance to various provision of
the Company Act.
• An unlisted issuer making a public issue i.e. (making an IPO) is required to satisfy
the following provisions:
• The Issuer Company shall meet the following requirements:
• Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full years.
• Distributable profits in at least three of the immediately preceding five years.
• Net worth of at least Rs. 1 Crore in each of the preceding three full years.
• If the company has changed its name within the last one year, at least 50% revenue for the
preceding 1 year should be from the activity suggested by the new name.
• The issue size does not exceed 5 times the pre- issue net worth as per the audited balance
sheet of the last financial year.
Classification of Issue
PUBLIC ISSUE :
• It involves raising of funds directly from the public and get themselves listed on the
stock exchange.
• In case of new companies, the face value of the securities is issue at par; and
• In the case of existing companies, the face value of securities are issued at premium.
1. Initial public offer (IPO):
• When an unlisted company makes either a fresh issue of securities or offers its
existing securities for sale or both for the first time to the public, it is called an IPO.
This paves way for listing and trading of the issuer‟s securities in the Stock
Exchanges.
2. Further public offer (FPO):
• When an already listed company makes either a fresh issue of securities to the public
or an offer for sale to the public, it is called a FPO.
Classification of Issue
• RIGHT ISSUE:
• Right issue is the method of raising additional finance from existing members by
offering securities to them on pro rata bases. The rights offer should be kept open
for a period of 60 days and should be announced within one month of the closure of
books.
• BONUS ISSUE:
• Companies distribute profits to existing shareholders by way of fully paid bonus
share in lieu of dividend.
• These are issued in the ratio of existing shares held.
• The shareholders do not have to make any additional payment for these shares.
• PRIVATE PLACEMENT:
• Private Placement is an issue of shares by a company to a select group of persons
under the Section 81 of the companies act 1956.
• It is a faster way for a company to raise equity capital.
Secondary Market
• Secondary Market refers to a market where securities are traded after
being initially offered to the public in the primary market and/or listed on
the stock exchange.
• It is the trading avenue in which the already existing securities are traded
amongst investors.
• Banks facilitate secondary market transactions by opening direct trading
and demat accounts to individuals and companies.
• The transactions of the secondary market are generally done through the
medium of stock exchange.
• The chief purpose of the secondary market is to create liquidity in
securities.
• Secondary market comprises of Equity market and Debt market.
Financial instruments in Secondary market
• Equity Shares:
• An equity share is commonly referred to as an ordinary share.
• It is an form of fractional ownership in which a shareholder, as a fractional owner,
undertakes the entrepreneurial risk associated with the business venture.
• Holders of the equity shares are members of the company and have voting rights.
• Right shares:
• This refers to the issue of new securities to the existing shareholders, at a ratio to
those shares already held.
• Bonus Shares:
• These shares are issued by the companies to their shareholders free of cost by
capitalization of accumulated reserves from the profit earned in the earlier years.
Financial instruments in Secondary market
• Preference shares:
• These shareholder do not have voting rights.
• Owners of these shares are entitled to a fixed dividend or a dividend calculated at a
fixed rate to be paid regularly before any dividend can be paid in respect of equity
shares.
• These shareholders also enjoy priority over the equity shareholders in the payment
of surplus.
• Cumulative Preference Shares:
• This is a type of preference shares on which dividend accumulates if it remains
unpaid.
• Cumulative Convertible Preference Shares:
• This is a type of preference shares on where the dividend payable on the same
accumulates, if not paid. After a specified date, these shares will be converted into
equity capital of the company.
Derivative Market
• Derivatives are synthetic instruments.
• They derive value from an underlying asset class.
• Asset classes range from financial instruments to commodities to even
classes such as weather and industrial effluents.
• However the common underlying theme of derivatives is that they are
leveraged products
• Derivatives are not always priced at respective asset value (fair value).
• Types –
1. Equity Derivatives
2. Interest Rate Derivatives
3. Currency Derivatives
Mutual Fund
• Form of trust that pools the funds of a whole lot of investors to make
more money by investing in an array of financial instruments.
• Advantages of a Mutual Fund:
• Professional Management
• Diversification
• Flexibility in choice - selection, redemption
• Low costs
• Transparency
Types of Mutual funds
• Open ended fund
• Close ended fund
• Interval fund
• Debt fund
• Equity fund
• Hybrid fund
• Other funds
Commodity Market
• A commodity is any good or service produced by human labor and
offered as a product for general sale on the market .
• Characteristics: Commodity is anything movable (a good) that has
following characteristics:
1. Fungible i.e. the same no matter who produces it
2. Derivatives, i.e. involves further processing into number of products
3. Economic cost, i.e. production of it involves some cost
Classification of Commodities
Bullion
Agriculture
Gold
Grains
Silver
Pulses
Palladium
Edible oils/seeds
etc
Spices etc

Commodities

Energy
Base Metals Crude oil
Copper Heating oil
Zinc Natural gas
Aluminum Furnace oil
Nickel Etc.
Tin