CAPITAL

MARKET
 CAPITAL MARKET
 The market where investment instruments
like bonds, equities and mortgages are
traded is known as the capital market.
 The primal role of this market is to make
investment from investors who have
surplus funds to the ones who are running
a deficit.
 The capital market offers both long term and
overnight funds.
 The different types of financial instruments that are
traded in the capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange instruments,
> hybrid instruments and
> derivative instruments.
 Nature of capital market
The nature of capital market is brought out by
the following facts:
 It Has Two Segments
 It Deals In Long-Term Securities
 It Performs Trade-off Function
 It Creates Dispersion In Business Ownership
 It Helps In Capital Formation
 It Helps In Creating Liquidity
 Types of capital market
There are two types of capital market:
 Primary market,
 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.
 In this market, the flow of funds is from
savers to borrowers (industries), hence, it
helps directly in the capital formation of
the country.
 The money collected from this market is
generally used by the companies to
modernize the plant, machinery and
buildings, for extending business, and for
setting up new business unit.
 Features of Primary Market
 It Is Related With New Issues
 It Has No Particular Place
 It Has Various Methods Of Float Capital:
Following are the methods of raising capital in
the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
 It comes before Secondary Market
 Secondary Market
 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.
 If an individual has bought
some security and he now wants
to sell it, he can do so through the
medium.
of stock exchange to sell
or purchase through the medium
of stock exchange requires the
services of the broker presently,
their are 24 stock exchange in
India.
 Features of Secondary Market
 It Creates Liquidity
 It Comes After Primary Market
 It Has A Particular Place
 It Encourage New Investments
 CAPITAL MARKET RISK
 Investment in long term financial
instruments is accompanied by high
capital market risks. Since there are two
types of capital markets- the stock market
and the bond market.
 So risks are present in both the market.
 Risk in the Stock Market
 Stock prices keep fluctuating over a
wide range unlike the bank deposits or
government bonds.
 The efficient market hypothesis shows
the effect of fundamental factors in
changing the price of the stock market.
 The Efficient Market Hypothesis shows that
all price movements are random whereas
there are plenty of studies that reflect the
fact that there is a specific trend in the stock
market prices over a period of time.
 Research has shown that there are certain
psychological factors that shape the stock
market prices.
 Sometimes the market behaves illogically to
any economic news.
 The stock market prices can be diverted in any
direction in response to press releases, rumors
and mass panic.

 The stock market prices are also subject to

speculation. In the short run the stock market
prices may be very volatile due to the
occurrences of the fast market changing events.
 Risk in the Bond Market
 Capital market risk in the bond market arises
due to interest rate changes. There is an inverse
relationship existing between the interest rate
and the price of the bond. Hence the bond
prices are sensitive to the monetary policy of
the country as well as economic changes.
 INDIAN CAPITAL MARKET
 The Indian Capital Market is one of the oldest
capital markets in Asia which evolved around
200 years ago.
Chronology of the Indian capital markets
>1830s: Trading of corporate shares and
stocks in Bank and cotton Presses in Bombay. 
>1850s: Sharp increase in the capital market
brokers owing to the rapid development of
commercial enterprise. 
 >1860-61: Outbreak of
the American Civil War and ' Share
Mania ' in India. 
>1894: Formation of the Hamada
Shares and Stock Brokers Association. 
>1908: Formation of the Calcutta
Stock Exchange Association.
The pattern of growth in the Indian
capital markets in the post
independence regime can be
analyzed from the following graphs:
From the above graph we find that
the number of stock exchanges in
India increased at a crawling pace
till 1980 but witnessed a sharp
rise thereafter till 1995.
The following diagram shows the
trend in the no. of listed companies
participating in the Indian Capital
Market. Here again we register a
sharp rise after 1980. The number of
stocks issued by the listed companies
also shows a similar trend:
 CAPITAL MARKET REPORT

 The Capital Market Report is prepared by

the capital market analysts and is of various
types.
 There are four different kinds of capital
market reports: >10-K Reports,
>10-Q Reports,
>Form 8-K Reports,
>the Proxy Statements .
 10-K Reports
 This is a kind of annual report of the company
that contains information of the company's
business, finances and management.
 This informs us about the bylaws of the company,
other legal documents and the lawsuits that the
company may have a hand in.
10-Q Reports or the Quarterly Reports
 The quarterly reports are the abridged form of
the annual reports.
 They are issued at an interval of three months.
 They consist of financial statements and list the
material events that have occurred in the
company.
 Form 8 –K Report
 The companies that are publicly traded are
required to maintain the Form 8-K where they
record any material event that might have
affected the financial status of the company
Proxy Statements
 The proxy statement consists of business
issues that need to be discussed in the meeting
and a ballot for voting for the purpose of
forming the new Board of directors.
 CAPITAL MARKET
INVESTMENT
 Capital market investment takes place
through the bond market and the stock market.
 The capital market is basically the financial
pool in which different companies as well as
the government can raise long term funds.
 Capital market investment that takes place
through the bond and the stock market may be
elucidated in the following heads.
Capital market investments in the stock
market
 The stock market is basically the trading
ground capital market investment in the following:
i) Company’s stocks
ii) Derivatives
iii) Other securities
 The capital market investments in the stock market
take place by:
1) Small individual stock investors
2) Large hedge fund traders.
 The capital market investments can occur either in:
1) The physical market by a method known as the
open outcry.
 2) Trading can also occur in the virtual
exchange where trading is done in the computer
network.
 The investors in the stock market have the liberty
to buy or sell the stock that they are holding at their
own discretion unlike the case of government
securities, bonds or real estate.
 The stock exchanges basically function as
the clearing house for such liquid transactions.
 The capital market investments in the stock market
are also done through the derivative instruments
like the stock options and the stock futures.
Capital Market Investments in the Bond Market
 The bond market is a financial market where the
participants buy and sell debt securities.
 The bond market is also differently known as the
debt, credit or fixed income market.
 There are different types of bond markets based on
the different types of bonds that are traded. They
are:
 Corporate,
 Government and agency, 
 Municipal,
 Bonds backed by mortgages & assets,
 Collateralized Debt Obligation.
 The bonds, except for the corporate bonds do
not have formal exchanges but are traded over-
the- counter.
 Individual investors are attracted to the bond
market and make investments through
the bond funds, closed-end-funds or the unit
investment trusts.
 Another way of investing directly in the bond
issue is the Exchange-traded-funds.
 The capital market investment in the bond
market is done by:
 Institutional investors
 Governments, traders and
 Individuals.