Capital Markets

CAPITAL MARKETS
Definition
 Capital market is referred to as a place where saving and investments are done between capital
suppliers and those who are in need of capital.
 It is therefore, a place where various entities trade different financial instruments.
 Capital market is where both debt and equity backed securities are bought and sold.
 The capital market is the best source of finance for companies. It offers a spectrum of investment
avenues to all investors which encourage capital creation
Functions of capital markets
• 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 markets
• 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 fund

Types of capital markets
Primary markets Secondary markets

 The primary market is a new issue market, it  The secondary market is a place where
solely deals with the issues of new securities trading takes place for existing securities. It is
known as stock exchange or stock market.
 Functions of primary market:
 Functions of secondary market:
- Origination
- Regular information about the value of security
- Underwriting
- Offers liquidity to the investors for their
- distribution assets
- Continuous and active trading
- Provide a Market Place
Types of capital markets
Primary market Secondary markets
 Prospectus: Prospectus contains information about Stock exchanges in India
the company such as the purpose for which funds
are being raised, past financial performance of the  The stock exchanges are the important player of the
company, background and future prospects of capital market. They are the platform of trading in
company securities and as such they assists and control the
 Offer for Sale: Under this method securities are not buying and selling of securities.
issued directly to the public but are offered for sale
through intermediaries like issuing houses or stock  There are mainly four stock exchanges in India as
brokers. follow:
 Private Placement: Private placement is the 1. Bombay Stock Exchange (BSE)
allotment of securities by a company to
institutional investors and some selected 2. National Stock Exchange (NSE)
individuals.
3. Over The Counter Exchange of India (OTCEI)
 Rights Issue: the shareholders are offered the
‘right’ to buy new shares in proportion to the 4. Regional Stock Exchanges
number of shares they already possess.
Instruments
Equity shares
shares Preference shares
bonds
debt
debentures
Futures & forward

derivatives
options
swap
SHARES
Equity Shares
- The purpose of equity instruments issued by corporations is to raise funds for the firms.
- It is equity ownership that allows the holders of this stock to enjoy voting rights on corporate matters. However, in
case the company suffers heavy losses and ends up bankrupt, the holders of the common stock are the last ones to get
their money back after creditors, bondholders, and holders of preferred stock.
Preference shares
- Preference shares are also a type of shares issued by a company that provides a predetermined dividend to the holder
unlike dividend to equity share holder where shareholder gets dividend as per the profit earned.
- Although dividend on the preferred stock are larger but they do not get voting power on the company matters.
- In case of liquidation of company, preference shareholders get to redeem their shares before the holders of the
common stock
DEBT
Debentures
- A debenture is a long-term debt instrument used by governments and large companies to obtain funds.
- It is a certificate of agreement of loans which is given under the company's stamp and carries an
undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the
principal amount whenever the debenture matures.
- In contrast to equity capital, which is a variable income security, the debentures are fixed income (i.e. in
respect of interest) security with no voting rights. Debentures are generally freely transferrable by the
debenture holder
DEBT
Bonds
Bonds are debt instrument, that are issued by companies and government.
- Major issuers of bonds are governments and firms, which issue corporate bonds.
- Some corporate bonds are secured against assets of the company that issued them, whereas other bonds are unsecured.
- By purchasing a bond, an investor lends money for a fixed period of time at a predetermined interest rate. - During
this period of time, investor receive a regular payment of interest semi-annually or annually.
- The yield on bonds are expressed commonly in two forms:
*Interest yield ( or running yield) - The return on a bond taking account only of the coupon payments.
*Yield to maturity ( or redemption yield) - The return on a bond taking account of the coupon cash flows and the capital
gain or loss at redemption .
Difference between bonds and debentures
•Bonds are more secured compared to debentures. A guaranteed interest rate is paid on the bonds that does
not change in value irrespective of the profit earned by the company.
•Bonds are more secure than debentures. The company provides collateral for the loan. Moreover, in case of
liquidation, bondholders will be paid off before debenture holders.
•In case of bankruptcy, Debenture holders have no collateral that a holder can claim from the company. To
compensate for this, companies pay higher interest rates to debenture holders, compared to Bond holders.
DERIVATIVES
Forwards and futures
These are financial contracts that obligate the contracts’ buyers to purchase an asset at a pre-agreed price on a specified
future date.
Both forwards and futures are essentially the same in their nature. However, forwards are more flexible contracts
because the parties can customize the underlying commodity as well as the quantity of the commodity and the date of
the transaction.
On the other hand, futures are standardized contracts that are traded on the exchanges. Every futures contract has the
following features:
- Buyer
- Seller
- Price
- Expiry
DERIVATIVES
Options
- Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset
at a predetermined price.
- An option can be a 'call' option or a 'put' option.
- A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is called 'strike price’.
- Similarly, a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the buyer. Here the buyer of the
contract has the right to sell and the seller has the obligation to buy.
- So, in any options contract, the right to exercise the option is vested with the buyer of the contract. The seller of the
contract has only the obligation and no right.
- As the seller of the contract bears the obligation, he is paid a price called as 'premium'. Therefore, the price that is
paid for buying an option contract is called as premium.
-The buyer of a call option will not exercise his option (to buy) if, on expiry, the price of the asset in the spot
market is less than the strike price of the call
DERIVATIVES
Swaps
- Swap refers to an exchange of one financial instrument for another between the parties concerned.
- This exchange takes place at a predetermined time, as specified in the contract.
- Swaps are not exchange oriented and are traded over the counter, usually the dealing are oriented through
banks.
- Currency swaps and interest rates swaps are the two most common kinds of swaps traded in the market.
Regulation of Capital Market
- The securities market is regulated by various agencies such as the Department of Economic Affairs (DEA), The
Department of company affairs (DCA), the Reserve Bank of India and the SEBI.
- The activities of these agencies are coordinated by a high level committee on capital and financial markets.
- The capital market for equity and debt securities is regulated by the Securities and Exchange Board of India. The
SEBI has full autonomy and authority to regulate and develop the capital market.
- The government has framed rules under the Securities Contracts Act (SCRA), the SEBI Act and the Depositories Act.
- The power in respect of the contracts for sales and purchase of government securities, money market securities and
ready forward contracts in debt securities are exercised concurrently by the RBI
THANK YOU

Capital Markets

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CAPITAL MARKETS

 It is therefore, a place where various entities trade different financial instruments.

• It acts in linking investors and savers

• Boosts economic growth

• Mobilization of savings to finance long term investment

• Facilitates trading of securities

• Minimization of transaction and information cost

• 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 fund

Primary markets Secondary markets

shares Preference shares

Futures & forward

Forwards and futures

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