INTRODUCTION TO CAPITAL MARKET

What is Market?
 A market is any arrangement that allows buyers and sellers to exchange
goods and services. A Market can occur in a place, over the internet, or the
phone.
 A market is a composition of systems, institutions, procedures, social
relations or infrastructures whereby parties engage in exchange.

What is Financial Market?

 Financial Markets include any place or system that provides buyers and
sellers the means to trade financial instruments, including bond, equities,
various internal currencies, and derivatives.
 Financial Markets facilitate the interaction between those who need
capital with those who have capital to invest.
 A Financial Market is the place where financial assets are created or
transferred.

Main functions of the Financial Market

a. It provides facilities for interaction between the investors and the
borrowers.
b. It provides pricing information resulting from the interaction between
buyers and sellers in the market when they trade the financial assets.
c. It provides security to dealings in financial assets.
d. It ensures liquidity by providing a mechanism for an investor to sell the
financial assets.
e. It ensures a low cost of transactions and information.

It can be broadly categorized into money markets and capital markets. Money
market handles short-term financial assets (less than a year) whereas capital
market take care of those financial assets that have maturity period of more than
a year.

TYPES OF FINANCIAL MARKET

1. Money Market – is the trade in short-term debt. It is a constant flow of

cash between governments, corporations, banks, and financial
institutions, borrowing and lending for a term as short as overnight and
no longer than a year.

Examples of Money Market

1. Certificate of Deposit
2. Treasury Bills
3. Commercial Papers

2. Capital Market – are avenues where savings and investment are

channeled between the suppliers who have capital and those who are in
need of capital. The entities that have capital include retail and
 institutional investors while those who seek capital are businesses,
governments, and people.

Examples of Capital Market

1. Stocks
2. Bonds
3. Treasury Bonds
4. Treasury Notes

Facts about Money Market and Capital Market

Money Market Capital Market

Deals with short-term financial
transactions (up to 1 year)
Working Capital Finance
Works only with bonds.
Example: commercial papers,
commercial bills, treasury bills etc.
Deals with high volume transactions.
Only banks are there.
The public does not participate much
in the Money market.
Deals with medium and long-term
financial transactions.
Promotes capital formation.
Deals with both bonds and equity.
Example: debentures, shares, etc.
Deals with all value transactions.
All financial institutions are there.
The public also participate
significantly.

Types of Capital Market

1. Primary Market – is the part of the capital market that deals with the
issuance and sale securities to investors directly by the issuer. An investor
buys securities that were never traded before. Primary markets create long
term instruments through which corporate entities raise funds from the
capital market.
2. Secondary Markets – (also called the aftermarket and follow on public
offering) is the financial market in which previously issued financial
instruments such as stocks and bonds are bought and sold.

Primary Market Secondary Market

It issues security for the first time.
Firms issues shares to the public.
Price is fixed by the firms.
Firms raise money for long-term
investments
There is no specific geographical
location.
Existing securities are bought and sold.
One investor sells it to another investor.
Price is fixed based on demand and supply.
Companies benefit from the secondary
markets.
There is no specific geographical location.

Entities in Capital Market

1. Suppliers – the one who supplies capital or those who have extra funds
(lenders)
2. Users – the one who uses capital or those who need capital (borrowers)
Some common example of suppliers of capital:
1. Pension funds – also known as a superannuation fund in some countries,
is any plan, fund, or scheme which provides retirement income.
2. Life insurance companies – offer contracts between an insurance
policyholder and an insurer or assurer, where the insurer promises to pay
a designated beneficiary a sum of money (the benefit) in exchange for a
premium, upon the death of an insured person (often the policyholder).
3. Non-financial companies – are those business which don’t accept deposits
or make loans.
Examples: Healthcare, Technology, Industrial, sector related companies.
4. Charitable Foundations – is a category of a nonprofit organization that
will typically provide funding and support for other charitable
organizations through grants.

Some common examples of users of capital:

1. People looking to purchase vehicles, home
2. Governments
3. Non-financial companies

ASSETS CLASSES AND FINANCIAL INSTRUMENTS

 Financial Instruments- is a real or virtual document representing a legal

agreement involving any kind of monetary value.
- Monetary agreements between parties
- A financial asset or liability that entails receiving or paying cash.

Types of Financial Instruments

1. Stocks – signifies a share of a company's ownership, as well as a claim

on its earnings and assets.
- Typically companies issues stock to raise capital

2 ways to earn money through stock ownership

 Dividends – a portion of a company's profits distributed to
shareholders in the form of shares or cash, typically paid
quarterly, similar to an investor bonus.
 Capital Appreciation – the difference between the purchase
and sale prices of an investment.
- An increase in the value of an asset such as property
or an investment
Types of Stocks
 Common Stocks - common stockholders have the power to vote
on corporate concerns such as the election of directors. However,
in the event of insolvency, they will be the last to get any
remaining firm assets.
 Preferred Stocks - These stockholders usually do not have
voting rights. However, they earn dividends (a percentage of the
 firm's revenues) before common stockholders and have a first
claim to assets if the company fails.

Shares – is a piece of the company an investor can own.

-unit of ownership
-an indivisible unit of capital that represents the
ownership connection between the company and the
shareholder.

Types of Shares
 Ordinary Shares – are the same as the common
stocks; holders are entitled to vote on corporate
matters and may receive dividends.
 Preference Shares – are the same as preferred stocks;
holders receives dividends before common stock
dividends are issued.
-in case of bankruptcy, preference shareholders may
be paid from company assets before common
stockholders.
 Deferred Shares – are usually issued to company
founder and executives where they are the last in line
to be pain in bankruptcy proceedings.
 Non-voting Shares – do not confer voting rights to
holder; they may have different rights and rights to
company assets in the liquidation.
2. Bonds – is a debt security issued by corporations, government or
other organization
-borrowers issues bonds to raise money from investors
willing to lend them money for a certain amount of time.
-types of investment in which you as the investor loan money
to a borrower, with the expectation that you’ll get your money
back with interest after your term length expires.
-they provide a predictable income stream

Types of Bonds
 Corporate Bonds – are fixed-income securities issued by
corporations to finance operations or expansions.
-is a type of debt security that is issued
by a firm and sold to investors.

 Government Bonds – a debt security issued by the government

to support government spending and obligations.
 Treasury Bonds (T-Bonds) – normally mature in 20
or 30 years and provide the greatest coupon or
interest, which is paid twice a year.
 Treasury Notes (T-Notes) – mature in two to ten
years, with semi-annual interest payment but often
smaller yields than T-Bonds.
  Treasury Bills (T-Bills) – have the shortest
maturities, ranging from four weeks to one year.
 Municipal Bonds (Munis) – a debt security issued by state,
municipality, or county to finance its capital expenditures.

 General Obligation Bonds – these bonds are not

secured by any assets, instead thay are backed by the
“full, faith and credit” of the issuer, which has the
power to tax residents to pay bondholders.
-backed by the taxing power of the entity
 Revenue Bonds – instead of taxes, these bonds are
backed by revenues from a specific project or source,
such as highway tolls or lease fees.
-backed by project income
 Conduit Bonds – government sometimes, issue
municipal bonds on behalf of private entities such as
non-profit colleges or hospitals.

Other Types of Securities/Instruments

1. Certificate of Deposit (CD) – is a savings product that earns
interest on a lump sum for a fixed period of time.
-are issued by scheduled commercial banks, credit unions,
brokerage firms

2. Commercial papers - an unsecured form of promissory notes

that pays a fixed rate of interest
-it is typically issued by large banks or corporation to cover
short-term receivables and short-term financial obligations;
such as funding for a new product.

 Assets classes - is a classification of investments based on similar

behaviors, attributes, and laws.

FIXED-INCOME
SECURITIES

ASSETS CLASSES EQUITIES

DERIVATIVES
 Fixed-income Securities – is a class of assets and securities that pay out a
set level of cash flows to investors, typically in the form of fixed interest or
dividends.
- are debt instruments issued by a government, corporation or other
entity to finance and expand their operation. They provide investors a
return in the form of fixed periodic payments and the eventual return of
principal at maturity.
- At maturity, investors are refunded their principal. The investment does
not expand in value over time in the same way as stocks do, but fixed-
income instruments should generate consistent income.

 Equity (also known as stock) – are shares of ownership in a firm. The value
of equities might fluctuate depending on the company's performance,
investor demand, and other factors. Ideally, equities improve in value over
time, generating profits for investors. Some equities also generate dividend
payments.

 Derivative Securities – are financial contracts between two or more

parties that are valued based on an underlying asset, group of assets, or
benchmark.