Capital Market overview

By: Priya Gupta(CS)

 Capital Market
A market in which individuals and institutions trade
financial securities. Organizations/institutions in the sell
securities on the capital markets in order to raise funds. A
capital market is a place that allows the trading of funding
instruments such as shares, debentures, debt instruments,
bonds, etc. It is a source for raising funds for individuals,
firms, and governments Thus, this type of market is
composed of both the primary and secondary markets.
Capital markets are also known as 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 is where Three categories will take
participants:
i) Issuer of securities: Borrowers or deficit savers who issue
securities to raise funds(corporate sector, central
government).
ii) Investors: Surplus savers who deploy savings by
subscribing to these securities(include retail investors,
mutual funds).
iii) The Intermediaries: Agents who match the need of the
users and suppliers of funds.
Nature Of Capital Market
The nature ofcapital market is brought out by the
Followingfacts:
*Its has two segments primary and secondary market. A capital
market provides individuals and firms with an avenue to raise
funds for their needs and wants. It is of two types – primary
market and secondary market.
The market plays a crucial role in economic development. It
mobilizes savings from individuals, banks, financial
institutions,
real estate, and gold, thus diverting savings from unproductive
channels to productive areas.
Commercial banks, financial institutions, individual investors,
insurance companies, business corporations, and retirement
funds are the major suppliers of funds in the market.
There are usually long-term investments here, such as shares,
shares, debt, government securities, debentures, bonds, etc.
Stock exchanges operate in the market .
*It performs trade-off function
. deals in long-term securities.
helps in creating liquidity.
creates dispersion in business ownership.
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 ofcapital market:

l. 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.
Classification of Capital Marketing
 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:
(a)Net Tangible Assets of at least Rs. 3 crores in each of the
preceding three full years.
(b) Distributable profits in at least three of the immediately
preceding five years.
 (c)Net worth Of at least Rs. I Crore in each Ofthe preceding
three full years. (d) Ifthe 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.
(e) The issue size does not exceed 5 times the pre- issue net
worth as per the audited balance sheet ofthe last financial year.
*MONEY MARKET: It is the market for short term funds i.e.
Up to one year maturity; or it is the market for lending and
borrowing of short term funds.

It consists of :
• Call money market: The call money market deals in short
term finance repayable on demand, with a maturity period
 varying from one day to 14 days. It is done mostly by
commercial banks.

• Bill market: Treasury bills are instrument of short-term

borrowing by the Government of India, issued as promissory
notes under discount.
• 364 days bill market: The 364 day treasury bills have thus
become an important instrument Of government borrowing
from market and also leading money market instrument in the
sense that their yield is most reflective of market condition.
Financial institutions recognise the yield rate on 364 days.
• Certificate Of Deposit(COD): It is a instrument Of borrowing
by commercial for a minimum period of 3 month and a
maximum Of I year in a multiples of 25 lakhs. The minimum
value is reduced and and is presently I lakh. It is issue on at a
discount to face value. And discount rate is freely determined
according to the market conditions.

• Commercial Papers (CPS): Commercial Paper is the short

term unsecured promissory note issued by corporate and
financial institutions at a discounted value on face value. They
come with fixed maturity period ranging from 3 to 6 months.
It is issued by companies with a net worth Of 10 cr later
reduced to 5 cr. It is issued in multiple of25 lakhs subject to
minimum issue of I cr.
• Repos and Reverse repos:
Repos: The rate at which the RBI lends money to
commercial banks is called repo rate, a short term for
repurchase agreement. A reduction in the repo rate will
help banks to get money at a cheaper rate. When the repo
rate increases borrowing from RBI becomes more
expensive. Reverse repos: To sell dated government
securities through auction at fixed cut-off rate of interest.
The objective is to provide short term avenue to bank to
park their Surplus funds when there is considerable
liquidity in money market.
Classification of Issues
 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.
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.
 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.

+ 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.

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

Equity Shares:
v' An equity share is commonly referred to as an ordinary share.
It is an form of ownership in which a shareholder, as a
fractional owner, undertakes the entrepreneurial risk
associated with the business venture.
•Z 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.
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.
 Meaning of Stock Exchange

A stock exchange is an important factor in the capital market. It

is a secure place where trading is done in a systematic way. Here,
the securities are bought and sold as per well-structured rules and
regulations. a stock exchange is a forum where securities like
bonds and stocks are purchased and traded. This can an online
trading platform, Securities mentioned here includes debenture
and share issued by a public company that is correctly listed at
the stock exchange, debenture and bonds issued by the
government bodies, municipal and public bodies.
 Functions of Stock Exchange

Following are some of the most important functions that are

performed by stock exchange:

Role of an Economic Barometer: Stock exchange serves

as an economic barometer that is indicative of the state
of the economy. It records all the major and minor
changes in the share prices. It is rightly said to be the
pulse of the economy, which reflects the state of the
economy.
Valuation of Securities: Stock market helps in the
valuation of securities based on the factors of supply and
demand. The securities offered by companies that are
profitable and growth-oriented tend to be valued higher.
Valuation of securities helps creditors, investors and
government in performing their respective functions.

Transactional Safety: Transactional safety is ensured as

the securities that are traded in the stock exchange are
listed, and the listing of securities is done after verifying
the company’s position. All companies listed have to
adhere to the rules and regulations as laid out by the
governing body.
Contributor to Economic Growth: Stock exchange offers
a platform for trading of securities of the various
companies. This process of trading involves continuous
disinvestment and reinvestment, which offers
opportunities for capital formation and subsequently,
growth of the economy.

Making the public aware of equity investment: Stock

exchange helps in providing information about investing
in equity markets and by rolling out new issues to
encourage people to invest in securities.
Offers scope for speculation: By permitting healthy
speculation of the traded securities, the stock exchange
ensures demand and supply of securities and liquidity.

Facilitates liquidity: The most important role of the stock

exchange is in ensuring a ready platform for the sale and
purchase of securities. This gives investors the
confidence that the existing investments can be
converted into cash, or in other words, stock exchange
offers liquidity in terms of investment.

Better Capital Allocation: Profit-making companies will

have their shares traded actively, and so such companies
are able to raise fresh capital from the equity market.
Stock market helps in better allocation of capital for the
investors so that maximum profit can be earned.

Encourages investment and savings: Stock market serves

as an important source of investment in various
securities which offer greater returns. Investing in the
stock market makes for a better investment option than
gold and silver.A market for securities- It is a wholesome
market where securities of government, corporate
companies, semi-government companies are bought and
sold.
Second-hand securities- It associates with bonds, shares
that have already been announced by the company once
previously.

Regulate trade in securities- The exchange does not sell

and buy bonds and shares on its own account. The broker
or exchange members do the trade on the company’s
behalf.

Dealings only in registered securities- Only listed

securities recorded in the exchange office can be traded.
Transaction- Only through authorised brokers and
members the transaction for securities can be made.

Recognition- It requires to be recognised by the central

government.

Measuring device- It develops and indicates the growth

and security of a business in the index of a stock
exchange.

Operates as per rules– All the security dealings at the

stock exchange are controlled by exchange rules and
regulations and SEBI guidelines.
Types of Stock Exchange -

Bombay National Regional

Stock Stock Stock
Exchange Exchange Exchanges
(BSE) (NSE)
 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
 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:
Fungible, i.e. the same no matter who produces it
Derivatives, i.e. involves further processing into number
of products
Economic cost, i.e. production of it involves some cost.

Classification of Commodities
 It provides for direct and indirect control of virtually all
aspects of securities trading and the running of stock
exchanges and aims to prevent undesirable transactions in
securities. It gives SEBI regulatory jurisdiction over
(a) stock exchanges through a process of recognition and
continued supervisions.
(b) contracts in securities.
(c) listing of securities on stock exchange.
Important SEBI Regulations
• SEBI( ISSUE OF CAPITAL AND DISCLOSURE
REQUIREMENTS)
Regulations, 2009
• SEBI ( ISSUE AND LISTING OF DEBT SECURITIES)
Regulations, 2008.
• SEBI ( PROHIBITION OF INSIDER TRADING )
Regulations, 1992
• SEBI ( MERCHANT BANKERS ) Regulations, 1992
• SEBI ( UNDERWRITERS ) Regulations, 1993
• SEBI ( REGISTRARS TO AN ISSUE AND SHARE
TRANSFER AGENTS ) Regulations, 1993
• SEBI ( BANKERS TO AN ISSUE ) Regulations, 1994
• SEBI ( SUBSTANTIALACQUISITION OF SHARES AND
TAKEOVERS ) Regulations 1997 (Takeover Code)
• SEBI ( PROHIBITION OF FRADULENT AND UNFAIR
TRADE PRACTICES RELATING TO SECURITIES
MARKET ) Regulations, 2003
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