CAPITAL MARKET

Introduction to Capital Market

Capital Market

 A capital market is a financial market in which long-

term debt or equity-backed securities are bought and sold.
 are markets that bring buyers and sellers together to trade
stocks, bonds, currencies, and other financial assets.
 Capital markets include the stock market and the bond
market. They help people with ideas become entrepreneurs
and help small businesses grow into big companies.
Capital Market

 Capital markets are the exchange system that transfers

capital from investors who don’t currently need their
funds to individuals and businesses that require the
capital to finance various projects or investments.
 Capital 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
Primary and Secondary Markets

Two Categories of Capital market

Primary Market
Secondary Market
Primary Market

The primary market provides the channel for sale of

new securities. The issuer of securities sells the securities in the
primary market to raise funds for investment and/ or to
discharge.
In other words, the market wherein resources are
mobilized by companies through issue of new securities is
called the primary market. These resources are required for
new projects as well as for existing projects with a view to
expansion, modernization, diversification and upgrade.
The issue of securities by companies can take place in any of
the following methods:
a. Initial public offer (securities issued for the first time to the
public by the company;
b. Further issue of capital;
c. Rights issue to the existing shareholder (on their
renunciation, the shares can be sold by the company to
others also);
d) Offer of securities under reservation/ firm allotment basis
to;
(i) foreign partners and collaborators,
(ii) mutual funds
(iii) merchant bankers
(iv) banks and institutions
(v) non resident citizen and overseas corporate bodies
(vi) Employees.
e) Offer to public
f) Bonus Issue.
 In primary market, new stock or bond issues are sold to
investors, often via a mechanism known as underwriting -
the process through which an individual or institution takes
on financial risk for a fee.
 The main entities seeking to raise long-term funds on the
primary capital markets are governments (which may be
municipal, local or national) and business enterprises
(companies).
 Governments issue only bonds, whereas companies
often issue both equity and bonds. The main entities
purchasing the bonds or stock include pension
funds, hedge funds, sovereign wealth funds, and less
commonly wealthy individuals and investment banks
trading on their own behalf.
 The primary market is of great significance to the
economy of a country. It is through the primary market that
funds flow for productive purposes from investors to
entrepreneurs.
The latter use the funds for creating new products and
rendering services to customers in the country and abroad. The
strength of the economy of a country is gauged by the activities
of the Stock exchanges.
The primary market creates and offers the merchandise
for the Secondary Market.
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.
Majority of the trading is done in the secondary market.
Secondary market comprises of equity markets and the
debt markets.
 The secondary market enables participants who hold
securities to adjust their holdings in response to changes in their
assessment of risk and return. They also sell securities for cash to
meet their liquidity needs.
The secondary market has further two components, namely

1) the over-the-counter (OTC) market; and

2) the exchange- traded market (centralized exchanges)
 An over-the-counter (OTC) market is a decentralized market
in which market participants trade stocks, commodities,
currencies or other instruments directly between two parties and
without a central exchange or broker. Over-the-counter markets
do not have physical locations; instead, trading is conducted
electronically.
OTC markets are essentially informal markets where trades
are negotiated.
 Central Exchanges are secondary market where buyers
and sellers meet in an central, physical location.

Exchanges such as the New York Stock Exchange, London

Stock Exchange, and Nasdaq provide a centralized, liquid
secondary market for investors who own stocks that trade on
those exchanges