CAPITAL MARKET

MANAGEMENT

INTRODUCTION

Dr. Marites A. Andres

Learning Objectives
At the end of this lesson the student will be able to:
• Explain the basic concepts of the classification of financial market.
• Understand the benefit of the different classifications of Financial
Market and the importance played by them.
• Differentiate the different types of financial market.
• Apply and know how to use the different financial instruments in
the financial market.
• Explore the major components of the international capital markets.
Financial Market
Financial Market refers to a marketplace, where creation
and trading of financial assets, such as shares,
debentures, bonds, derivatives, currencies, etc. take place. It
plays a crucial role in allocating limited resources, in the
country’s economy. It acts as an intermediary between the
savers and investors by mobilizing funds between them.
The financial market provides a platform to the buyers and
sellers, to meet, for trading assets at a price determined by
the demand and supply forces.
Functions of Financial Market

• It facilitates mobilization of savings and puts it to

the most productive uses.
• It helps in determining the price of the securities.
The frequent interaction between investors helps in
fixing the price of securities, on the basis of their
demand and supply in the market.
Functions of Financial Market
• It provides liquidity to tradable assets, by
facilitating the exchange, as the investors can readily
sell their securities and convert assets into cash.
• It saves the time, money and efforts of the
parties, as they don’t have to waste resources to find
probable buyers or sellers of securities. Further, it
reduces cost by providing valuable information,
regarding the securities traded in the financial
market.
Classification of Financial Market
Classification of Financial Market

1. By Nature of Claim
• Debt Market: The market where fixed claims or
debt instruments, such as debentures or bonds
are bought and sold between investors.
• Equity Market: Equity market is a market wherein
the investors deal in equity instruments. It is the
market for residual claims.
Classification of Financial Market

2. By Maturity of Claim
• Money Market: The market where monetary
assets such as commercial paper, certificate of
deposits, treasury bills, etc. which mature within a
year, are traded is called money market. It is the
market for short-term funds. No such market exist
physically; the transactions are performed over a
virtual network, i.e. fax, internet or phone.
Classification of Financial Market
• Capital Market: The market where medium and long term
financial assets are traded in the capital market. It is divided into
two types:
• Primary Market: A financial market, wherein the company
listed on an exchange, for the first time, issues new security
or already listed company brings the fresh issue.
• Secondary Market: Alternately known as the Stock market,
a secondary market is an organized marketplace, wherein
already issued securities are traded between investors, such
as individuals, merchant bankers, stockbrokers and mutual
funds.
Classification of Financial Market
3. By Timing of Delivery
• Cash Market: The market where the transaction
between buyers and sellers are settled in real-
time.
• Futures Market: Futures market is one where the
delivery or settlement of commodities takes place
at a future specified date.
Classification of Financial Market
4. By Organizational
• Structure Exchange-Traded Market: A financial
market, which has a centralized organization with
the standardized procedure.
• Over-the-Counter Market: An OTC is
characterized by a decentralized organization,
having customized procedures.
Debt Market
• The debt market, or bond market, is the arena in which
investment in loans are bought and sold. There is no single
physical exchange for bonds. Transactions are mostly made
between brokers or large institutions, or by individual
investors.
• Investments in debt securities typically involve less risk than equity
investments and offer a lower potential return on investment. Debt
investments by nature fluctuate less in price than stocks. Even if a
company is liquidated, bondholders are the first to be paid
• Bonds are the most common form of debt investment. These are
issued by corporations or by the government to raise capital for
their operations and generally carry a fixed interest rate.
Equity Market
• Equity, or stock, represents a share of ownership of a company.
The owner of an equity stake may profit from dividends.
Dividends are the percentage of company profits returned to
shareholders. The equity holder may also profit from the sale of
the stock if the market price should increase in the marketplace.
• The equity market is volatile by nature. Shares of equity can
experience substantial price swings, sometimes having little to do with
the stability and good name of the corporation that issued them.
• Volatility can be caused by social, political, governmental, or economic
events. A large financial industry exists to research, analyze, and
predict the direction of individual stocks, stock sectors, and the equity
market in general.
Money Market
The money market is an organized exchange market
where participants can lend and borrow short-term,
high-quality debt securities with average maturities of
one year or less. It enables governments, banks, and
other large institutions to sell short-term securities to
fund their short-term cash flow needs. Money markets
also allow individual investors to invest small amounts
of money in a low-risk setting. 
 
Functions of Money Market
1. Financing Trade
2. Central Bank Policies
3. Growth of Industries
4. Commercial Banks Self-Sufficiency
Types of Instruments Traded in the Money Market
1. Treasury Bills
• Treasury bills are considered the safest instruments since
they are issued with a full guarantee by the United States
government. They are issued by the U.S. Treasury regularly to
refinance Treasury bills reaching maturity and to finance the
federal government’s deficits. They come with a maturity of
one, three, six, or twelve months.
2. Certificate of Deposit (CD)
• A certificate of deposit (CD) is issued directly by a commercial
bank, but it can be purchased through brokerage firms. It
comes with a maturity date ranging from three months to five
years and can be issued in any denomination.
Types of Instruments Traded in the Money Market
3. Commercial Paper
• Commercial paper is an unsecured loan issued by large
institutions or corporations to finance short-term cash flow needs,
such as inventory and accounts payables. It is issued at a
discount, with the difference between the price and face value of
the commercial paper being the profit to the investor.
4. Banker’s Acceptance
• A banker’s acceptance is a form of short-term debt that is issued
by a firm but guaranteed by a bank. It is created by a drawer,
providing the bearer the rights to the money indicated on its face
at a specified date. It is often used in international trade because
of the benefits to both the drawer and the bearer.
Types of Instruments Traded in the Money Market

5. Repurchase Agreements
• A repurchase agreement (repo) is a short-term form of
borrowing that involves selling a security with an
agreement to repurchase it at a higher price at a later
date. It commonly used by dealers in government
securities who sell Treasury bills to a lender and agree to
repurchase them at an agreed price at a later date.
Capital Market

Capital markets are financial markets where people buy and sell

long-term debt or equity-backed securities. These markets direct
savers’ funds to those who can put them to long-term productive
use. For example, governments and corporations making long-
term investments are always looking for long-term investors.
A company may issue securities in the form of bonds or shares.
They aim to raise money. Regional or national governments may
also issue bonds. Entities in need of long-term cash issue bonds to
raise money.
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
Functions of Capital Market
• 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
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). 
Functions of Primary Market
• 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.
• 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.
• 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:
• Regular information about the value of security
• Offers liquidity to the investors for their assets
• Continuous and active trading
• Provide a Market Place
Key Players in the Primary Market

1. Corporations
2. Institutions (“Buy Side” Fund Managers)
3. Investment Banks (“Sell Side”)
4. Public Accounting Firms
Key Players in the Secondary Market
1. Buyers and Sellers
2. Investment Banks
Cash Market
A cash market is a marketplace in which the commodities or
securities purchased are paid for and received at the point of
sale. For example, a stock exchange is a cash market
because investors receive shares immediately in exchange for
cash.
Cash markets are also known as spot markets, because their
transactions are settled "on the spot." The opposite of a cash
market is a futures market, where buyers pay for the right to
receive a good, such as a barrel of oil, at a specified date in
the future.
Futures Market
• A futures market is an auction market in which participants buy
and sell commodity and futures contracts for delivery on a
specified future date. Futures are exchange-traded derivatives
contracts that lock in future delivery of a commodity or security at
a price set today.
• Examples of futures markets are the New York Mercantile
Exchange (NYMEX), the Kansas City Board of Trade, the
Chicago Mercantile Exchange (CME), the Chicago Board of
Trade (CBoT), Chicago Board Options Exchange (CBOE) and
the Minneapolis Grain Exchange
Exchange Traded Markets
Exchange-traded markets are the one in which all transactions
are routed through a central source. In other words, one party
is responsible for being the intermediary that connects buyers
and sellers. The downside of this is that it gives the
intermediary immense power in shaping the market. The
upside is that it allows for better enforcement of transactions
and security measures; for instance, exchange-traded markets
can standardize products, and can ensure that payments and
goods are delivered in accordance with the terms of the trade .
Over the Counter Markets
Over-the-counter (OTC) markets are largely decentralized.
There are multiple intermediaries that compete to connect
buyers and sellers. The upside of this is that competition
to be the intermediary ensures that transaction cost -- the
cost imposed by the intermediary to execute the trade -- is
lower. The downside is that the market can be more
unregulated, and more prone to intermediaries with
dishonest and fraudulent practices.
EXERCISES

1. Based on your understanding, discuss briefly

the different types financial market.
2. Discuss briefly also what you have learned
from this lesson.
REFERENCES
Avadhani, V.A. (2011), Capital Market Management 4 th Edition,
Himalaya Publishing House Pvt. Ltd., Girgaon, Mumbai.
Fabozi, F.J. & Drake, P.P, (2009), Capital Markets, Financial
Management and Investment management, John Wiley &
Sons, Inc., Hoboken, New Jersey.
Hayes, Adam (2021), Capital Markets, Retrieved from:
https://www.investopedia.com/terms/c/capitalmarkets.asp
saylordotorg.github.io/text_international-business/s11-02-
understanding-international-ca.html
Thank You