1) Capital Market

Capital market is a long term market where buyers and sellers engage in trade
of financial securities like bonds, stocks, etc. The buying/selling is undertaken
by participants such as individuals and institutions.

Functions of Capital Market:

 It acts in linking investors and savers

 Facilitates the movement of capital to be used more profitability and
productively to boost the national income
 Boosts economic growth
 Mobilization of savings to finance long term investment
 Facilitates trading of securities
 Minimization of transaction and information cost
 Encourages a massive range of ownership of productive assets
 Quick valuations of financial instruments
 Through derivative trading, it offers insurance against market or price
threats
 Facilitates transaction settlement
 Improvement in the effectiveness of capital allocation
 Continuous availability of funds

Types of Capital Market

 Classification of capital market

 Primary Market:

The primary market is a new issue market; it solely deals with the issues of
new securities. A place where trading of securities is done for the first time.
The main objective is capital formation for government, institutions, companies,
etc. also known as Initial Public Offer (IPO). Now, let us have a look at the
functions of primary market:
1. Origination: Origination is referred to as examine, evaluate, and process new
project proposals in the primary market. It begins prior to an issue is present
in the market. It is done with the help of commercial bankers.
2. Underwriting: For ensuring the success of new issue there is a need for
underwriting firms. These are the ones who guarantee minimum subscription.
In case, the issue remains unsold the underwriters have to buy. But if the
issues are completely subscribed then there will be no liability left for them.
3. Distribution: For the success of issue, brokers and dealers are given job
distribution who directly contact with investors.

 Secondary Market:
The secondary market is a place where trading takes place for existing
securities. It is known as stock exchange or stock market. Here the securities
are bought and sold by the investors. Now, let us have a look at the functions
of secondary market:
1. Regular information about the value of security
2. Offers liquidity to the investors for their assets
3. Continuous and active trading
4. Provide a Market Place

2) Difference between Equity shares and Preference shares.

BASIS FOR
EQUITY SHARES PREFERENCE SHARES
COMPARISON

Meaning Equity shares are the Preference shares are the

ordinary shares of the shares that carry preferential
company representing the rights on the matters of
part ownership of the payment of dividend and
shareholder in the company. repayment of capital.

Payment of The dividend is paid after Priority in payment of dividend

dividend the payment of all liabilities. over equity shareholders.

Repayment of In the event of winding up In the event of winding up of

capital of the company, equity the company, preference
shares are repaid at the shares are repaid before equity
end. shares.

Rate of Fluctuating Fixed

dividend

Redemption No Yes

Voting rights Equity shares carry voting Normally, preference shares do

rights. not carry voting rights.
 BASIS FOR
EQUITY SHARES PREFERENCE SHARES
COMPARISON

However, in special
circumstances, they get voting
rights.

Convertibility Equity shares can never be Preference shares can be

converted. converted into equity shares.

Arrears of Equity shareholders have no Preference shareholders

Dividend rights to get arrears of the generally get the arrears of
dividend for the previous dividend along with the present
years. year's dividend, if not paid in
the last previous year, except
in the case of non-cumulative
preference shares.

3) What is Derivatives?
A derivative is a contract between two parties which derives its
value/price from an underlying asset. The underlying asset could be
shares, bonds, currencies, commodities, etc. The most common types of
derivatives are futures, options, forwards and swaps.

BASIS FOR FORWARD

FUTURES CONTRACT
COMPARISON CONTRACT

Meaning Forward Contract is an A contract in which the

agreement between
parties to buy and sell the
underlying asset at a
specified date and agreed
rate in future.
parties agree to exchange
the asset for cash at a fixed
price and at a future
specified date, is known as
future contract.

What is it? It is a tailor made It is a standardized contract.

 BASIS FOR FORWARD
FUTURES CONTRACT
COMPARISON CONTRACT

contract.

Traded on Over the counter, i.e. Organized stock exchange.

there is no secondary
market.

Settlement On maturity date. On a daily basis.

Risk High Low

Default As they are private No such probability.

agreement, the chances of
default are relatively high.

Size of contract Depends on the contract Fixed

terms.

Collateral Not required Initial margin required.

Maturity As per the terms of Predetermined date

contract.

Regulation Self regulated By stock exchange

Liquidity Low High

4) What is money market?

Money market is the market where short term instruments of credit with
a maturity period of one year or less than that are traded. Over-the-
counter trading is done in the money market and it is a wholesale
process. It is used by the participants as a way of borrowing and lending
for the short term. Money market consists of negotiable instruments such
 as treasury bills, commercial papers and certificates of deposit. It is used
by many participants, including companies, to raise funds by selling
commercial papers in the market. Money market is considered a safe
place to invest due to the high liquidity of securities. The money market
is an unregulated and informal market and not structured like the capital
markets, where things are organized in a formal way. Money market gives
lesser return to investors who invest in it but provides a variety of
products.

5) What is Mutual Funds? Explain different types of funds?

Mutual fund is an association which pools the savings of the investors
who share common financial goals. The money collected by number of
investors invested in different types of financial instruments for the
mutual benefits of its members. The income earned on these investments
is then shared by the unit holders in proportion to the number of units
held by them.

Types of Mutual Funds based on asset class

 Equity Funds: These are funds that invest in equity stocks/shares of

companies. These are considered high-risk funds but also tend to provide
high returns. Equity funds can include specialty funds like infrastructure,
fast moving consumer goods and banking to name a few. They are linked
to the markets and tend to be fluctuating as per the market movement.

 Debt Funds: These are funds that invest in debt instruments e.g. company
debentures, government bonds and other fixed income assets. They are
considered safe investments and provide fixed returns.

 Balanced or Hybrid Funds:  These are funds that invest in a mix of asset
classes. In some cases, the proportion of equity is higher than debt while
in others it is the other way round. Risk and returns are balanced out
this way. 
 What is underwriting?
Underwriting is one of the most important functions in the financial world
wherein an individual or an institution undertakes the risk associated with
a venture, an investment, or a loan in lieu of a premium. Underwriters
are found in banking, insurance, and stock markets.
In the securities market, underwriting involves determining the risk and
price of a particular security. It is a process seen most commonly during
initial public offerings, wherein investment banks first buy or underwrite
the securities of the issuing entity and then sell them in the market. This
ensures that the issuers of the security can raise the full amount of
capital while earning the underwriters a premium in return for the service.

Underwriters in the banking sector perform the critical operation of

appraising the credit worthiness of a potential customer and whether or
not to offer it a loan. They appraise the credit history of the customer
through their past financial record, statements, and value of collaterals
provided, among other parameters.