What is Capital Market?

Pyramid

"Thispresentation covers the fundamentals of the Indian capital markets. It includes a briefing on the various instruments available for fund raising and investing. It will help you understand the basics of shares, debentures, bonds, commodities and other instruments".

IntroductionFor starting any business, an entrepreneur needs investment in the form of capital

An entrepreneur may not be able to invest his own money so he has to borrow

Problem in borrowing

Banks / Financial Institutions may demand a security for their loans in the form of a collateral

What is a Capital Market?A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds

It is defined as a market in which money is provided for periods longer than a year

Capital market is a market for long term debts and equity shares

The issue may be Shares, Debentures, Bonds, etc.

Importance of Capital MarketPool the capital resources

Solve the problem of shortage of funds

Mobilize the small and scattered savings

Increase the availability of invest-able funds

Provide a number of profitable investment opportunities for a small savers

CAPITAL MARKETPRIMARY MARKET

SECONDARY MARKET

PUBLICISSUE

RIGHTISSUE

BONUSISSUE

PRIVATEPLACEMENT

PRIVATEPLACEMENT

Classification of Capital Market

Primary

The market for new securities issues.

In the primary market, the security is purchased directly from the issuer.

Initial Public Offering (IPO)

When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the
issuers securities.

Follow on Public Offering (Further Issue)

When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an Offer document.

Primary Market

Rights Issue

A rights issue is a way in which a company can sell new shares in order to raise capital. Shares are offered to existing shareholders in proportion to their current shareholding. This route is best suitedfor companies who would like to raise capital without diluting stake of its existing shareholders.

Preferential Issue

An issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.

Primary Market (Contd)

Secondary MarketSecondary 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.

Secondary market comprises of Equity market and Debt market.

It is the trading avenue in which the already existing securities are traded amongst investors.

Financial Instruments dealt in Secondary MarketEquity Shares:

An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture

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.

Preference shares:

Preferred share has characteristics of both common shares and bonds. Like common shares, preferred share owners have an ownership interest in the company. Like bonds, preferred stocks carry a commitment by the company to pay a fixed amount of interest to shareholders in the form of dividends. However, preferred stocks dividends must be paid before common stock dividends.

Debentures:

Debentures are issued by a company to raise short to medium term loans needed for expenses or expansions. It is an unsecured bond in which the bondholder has no claim on the assets of the bond issuer.

Bonds:

A bond is a negotiable certificate evidencing indebtedness. It is normally unsecured.

Financial Instruments dealt in Secondary Market (Contd)

DepositoryA depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.

There are two Depositories in our country:NSDL

CDSL

Corporate Actions Dividend:

Dividend is distribution of part of company's earnings to shareholders, usually twice a year in the form of a final dividend or an interim dividend.

Stock Split:

When company splits the existing shares of a particular face value into smaller denominations so that the number of shares increase, the market capitalization or the value of shares held by the investors post split remains the same as that before the split.

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.

Buy back:

A method for company to invest in itself by buying shares from other investors in the market. Buybacks reduces the number of shares outstanding in the market.

Rolling Settlement:

Under rolling settlement all open positions at the end of the day mandatorily result in payment/ delivery n days later. Currently trades in rolling settlement are settled on T+2 basis where 'T' is the trade day.

Pay- in Day and Pay-out Day:

Pay-in day is the day when the brokers make payments or delivery of securities to the exchange.

Pay-out day is the day when the exchange makes payment or delivery of securities to the broker.

Corporate Actions (Contd)

Depository

A Company where the shares of an individual are held in an electronic form, at the request of the shareholder.

Stock exchange

A Company that provides services for stock brokers and traders to trade stocks, bonds and other securities.

Clearing Corporation

A Company which works with the exchanges to handle confirmation, delivery and settlement of transactions.

Clearing Members

A Member of the Clearing Corporation who clears and settles deals through the Clearing Corporation.

Trading Member

A Member of Exchanges who has the right to execute transactions in the trading system of the exchange.

Role of Various Participants

DerivativeDerivative is a contract which derives its value from the prices of underlying assets.

Future:

An agreement between two parties to buy or sell an asset at a certain time in the future at a certain price

Future Price = Spot Price + Cost of Carry

Options

Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

Financial Future:

A future contract for which the underlying assets are stocks or index

Commodity Future:

A future contracts for which underlying assets is commodity.

Commodity Spot:

Cash Segment of commodity market.

Currency Future:

A future contracts for which underlying assets is the Currency.

Derivative (Contd)

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Economy & Finance

What is Capital Market?