Capital Market
Meaning and Concept of Capital Market
Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market intruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money mone y for a longer period of o f time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy consultanc y services and underwriting.
Significance, Role or Functions of Capital Market
Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.
Let us get acquainted with the important functions and role of the capital market. 1. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. econom y. In that sense it activate the ideal monetar y resources and puts them in proper investments. 2. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. 3. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a lon g period of time. It provides suitable interest rate rate returns also to investors. Instruments such such as bonds, equities, units of mutual funds, insurance insurance policies, policies, etc. definitely provides diverse investment avenue for the public.
4. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements ofbusiness ofbusiness houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. 5. Proper Regulation of Funds : Capital C apital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. 6. Service Provision : As an important financial set u p capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. 7. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both bu yers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy. These are the important functions of the capital m arket.
Definition A financial market that works as a conduit f or de or deman mand d and supply of debt and an d equi ty capital capital . I t channels the th e money provi pr ovided ded by savers and depos depositor itor y instituti ons (banks, credit unions, in sur ance compani es, etc.) to borrowers and i nvestee nvestees s th r ough a vari ety of financial instruments (bonds, notes, shares) called securities. A capital mark et i s not a compact unit, but a h igh ly dece decentr ali zed system made up of thr ee major parts: (1) stock mar ket, (2) bond mark et, and (3) mone mon ey mar ket. I t also works as an exchange f or trading or trading existing claims on capital capital in the form of shar es.
CAPITAL MARKET INSTRUMENT Following are the terminology of capital market: 1. Pure Instrument: Instrument: Equity shares, Preference shares shares and debenture or bonds which are issued with the basic charterstics without mixing the instruments are called Pure Instrument. 2. Hybrid Instrument Instrument : Those instrument which are created by combining the features of equity with bond, preference or equity equit y shares is called as Hybrid Instrument. This is created in order to fulfill the needs of investors. For example: C onvertible Preference Shares, Partial convertible debentures etc. 3. Derivative: are those instrument whose value is determined determined from the reference reference of other financial instruments. instruments. For example: future future and option 4. Equity Shares: are those shares shares which refer refer to a part of ownership as a shareholder shareholder . These type of shareholder undertakes the maximum entrepreneurial entrepreneurial risk risk associate with the business. 5. Preference shares: shares: Sec. 85(1) of the Companies Act defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. compan y. Thus, both the preferential rights include (a) preference in payment of dividend and (b) preference in repayment of capital in case of winding up of the company, com pany, must attach to preference shares. 6. Cumulative Preference Shares : are those preference shares which gets dividend in first claim as and when dividends are declared .if the company is not earned profit, then the dividend get accumulated and whenever company earns profit the shareholder will get all the accumulated dividend. 7. Non – Non – Cumulative Cumulative Preference Shares: are those preference shares which does not accumulate the profit if the company has not earned the profit. profit. As and when the company declare dividend then only it goes to non- cumulative preference shares. 8. Convertible Preference Shares: If the Preference Share holders have termed termed in issue of shares that they can convert the preference shares into equity shares. shares. These type of convertible shares are called as Covertible Preference Shares. Preference shares are convertible because to get various rights like voting rights, bonus issue and h igher dividend. So for these issues, companies issues these shares with premium. 9. Redeemable Preference Shares : When the preference shares are issued issued with with the stipulation that these shares are to be redeemed after a certain period of time, then such preference shares are known as redeemable preference shares. If a company collects the money through redeemable preference shares, this money must be returned on its maturity whether
company is liquidated or not. These T hese shares are issued only to raise the capital for tempora ry period. 10. Irredeemable Preference Shares: are those shares which are issued with the terms that shares will be not redeemed for indefinite period e xcept certain instances like winding up. 11. Participating Preference Shares : If a company earns profit then it gets distributed to preference shareholders, equity shareholders etc. But after that also profit profit is left, then such profit can again distribute as dividend to participating preference shareholder as well as company can also issue bonus shares. 12. Debentures : includes stocks, stocks, bonds etc which are issued issued by the company as a certificate of indebtness. For the issue of debentures, date o f the repayment of principle and interest is decided . It is created on the charge of undertaking of assets of the company. If the company is not able to make the payment on the time, so the investors can redeem the debentures by undertaking the assets or from the sale of assets.
15. Redeemable debentures: are those debentures which are redeemable after a certain certain period or on their expiry date. 16. Perpetual debentures: are those debentures which are issued for the redemption on any specific event like winding up which may happen for any indefinite period. 17. Bearer debentures: are the debentures payable to bearer and also transferrable and the name of the holder will not be registered in the books of the company. SO whoever is the holder can bear the principle and interest as on due.
19. Sweat Equity Shares: are shares allotted to employees o companies, as rewards, rewards, free of cost or at a price which is considerable below the ruling market price. It is given as a reward for performance to further encourage them to put in their best in the organization. Under the Companies act, 1956, sweat equity shares means equity shares issued by a company to its employees or directors at a discounts or for consideration other than cash for providing know how or making available rights in the nature n ature of intellectual property rights. Such issue may b e made only if it is authorized by a special resolution passed by the company in the general meeting specifying the number of shares to be issued, class of the employees or directors to whom such shares are to be issued , the consideration and the current market price of the equity shares. Sweat equity shares can be issued if more than one year has elapsed from the commencement of the business. All limitations, restriction and provisions relating to equity shares shall be applicable to such sweat equity shares.
Primary and Secondary Markets The Primary market deals in newly issued securities where the p rice is fixed by the underwriter. Secondary markets deal with already issued stocks / bonds. The Primary market deals in newly issued securities where the price is fixed by the underwriter. Primary markets act as a source of new funds for the company issuing the stocks or bonds. Underwriters often reserve for themselves and their important clients a portion of the primary shares as part of their commission. Secondary markets deal with already issued stocks an d bonds and are the securities markets that we are most familiar with, including the New York Stock Exchange and the NASDAQ market. Security prices are determined in secondary mark ets by supply and demand. When securities are sold on the primary market, the main recipient of funds is the company issuing the securities. When a transaction is made on the secondary market, the party (usually an individual or mutual fund) that owns and sells a security receives the money
What is the difference between Money Market and Capital Market?
Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions: 1. Maturity Period:
The money market deals in the lending and borrowing of short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year). 2. Credit Instruments:
The main credit instruments of the money market are call money, acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds, securities of the government.
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4. Institutio Institutions: ns:
Important institutions operating in the' money market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc. 5. Purpose of Loan:
The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc. 6. Risk:
The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. Risk varies both in degree and nature throughout the capital market. 7. Basic Role:
The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to lon g-term, secure and productive employment. 8. Relation with Central Bank:
The money market is closely and directly linked with central bank of the country. The capital market feels central bank's influence, but mainl y indirectly and through the money market. 9. Market Regulation:
In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated. Recent Developments in Capital Market of India
The Indian capital market has witnessed major reforms in the decade of 1990s and there after. It is on the verge of the growth. Thus, the Government of India and SEBI has taken a number of measures in order to improve the working of the Indian stock exchanges and to make it more progressive and vibrant. Reforms in Capital Market of India
The major reforms undertaken in capital market of India includes:1. Establishment of SEBI : The Securities and Exchange Board of India (SEBI) was established in 1988. It got a legal leg al status in 1992. SEBI was primarily set up to re gulate the activities of the merchant banks, to control the operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a regulatory authority of new issue activities of companies. The SEBI was set up with the fundamental objective, "to "to protect the interest of investors in securities market and for matters connected therewith or incidental thereto." thereto." The main functions of SEBI are:i. To regulate the business of the stock market an d other securities market. ii. To promote and regulate the self regulatory organiz ations. iii. To prohibit fraudulent and unfair trade practices in securities market. iv. To promote awareness among investors and training of intermediaries about safety of market. v. To prohibit insider trading in securities market. vi. To regulate huge acquisition of shares and takeover of companies. 2. Establishment of Creditors Rating Agencies : Three creditors rating agencies viz. The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market a ctivities. It is a guide for the investors also in evaluating the risk of their investments. their investments. 3. Increasing of Merchant Banking Activities : Many Indian and foreigncommercial foreigncommercial banks have set up their merchant banking divisions d ivisions in the last few years. These divisions provide financial services such as underwriting facilities, issue organising, consultancy services, etc. It has proved as a helping hand to factors related to the capital market. 4. Candid Performance of Indian Economy : In the last few years, Indian economy econom y is growing at a good speed. It has attracted a huge inflow of Foreign Institutional Investments (FII). (FII). The massive entry of FIIs in the Indian capital market has given good appreciation for the Indian investors in recent times. Similarly many new companies are emerging on the horizon of the Indian capital market to raise capital for their expa nsions. 5. Rising Electronic Transactions : Due to technological development in the last few years. The physical transaction with more paper work is reduced. Now paperless transactions are increasing at a rapid rate. It saves money, time and energy of investors. Thus it has made investing safer and hassle free encouraging more people to join the capital market. i. : The growing of mutual funds in India has certainly helped the capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms have launched many new funds. A big diversification in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the common investors to enter the capital market. 6. Growing Stock Exchanges : The numbers of various of various Stock Exchanges in India are increasing. Initially the BSE was the main exchange, but now after the setting up of the NSE and
the OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected Stock Exchange of India has joined the existing stock exchanges. 7. Investor's Protection : Under the purview of the SEBI S EBI the Central Government of India has set up the Investors Education and Protection P rotection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the interest of the small investors from frauds and malpractices in the capital market. 8. Growth of Derivative Transactions : Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it also introduced the future and options transactions. These innovative products have given variety for the investment leading to the expansion of the capital market. 9. Insurance Sector Reforms : Indian insurance sector has also witnessed massive reforms in last few years. The Insurance Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the private insurance firms in India. As many insurance companies invest their money in the capital market, it has expanded. 10. Commodity Trading : Along with the trading of ordinary securities, the trading in commodities is also recently encouraged. The Mu lti Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate. Apart from these reforms the setting up of Clearing Corporation of India Limited (CCIL), Venture Funds, etc., have resulted into the tremendous growth of Indian capital market.
Primary Market Primary Market, also called the New Issue Market , is the market for issuing new securities. The main players of these markets are the private and public companies that tha t offer equity or debt based securities such as stocks and bonds in order to raise money for their operations such as business expansion, modernization and so on. They sell their securities to the public through an Initial Public Offering (IPO). The securities can be directly bought from the shareholders, which is not the case for the secondary market. The primary market is a market for new capital that will be traded over a longer period. Here the securities are issued on an exchange basis.
A primary market is not inclusive of sources, from where compa nies can generate external finance over a long term, such as loans provided by financial organizations. Through these markets, companies can also go public, which means changing private capital to public capital. Many companies have entered the primary market to earn profit by converting their capital, which is basically a private capital, into a public one, releasing securities to the public. This phenomena is known as "public issue" or "going public" .
Primary Market Underwriters: Investment banks are the main underwriters in the primary markets and thus are the major facilitators of these types of markets. They normally decide the base price of the securities on sale and then administer the entire process of its sale to the investors.
The underwriters also play the important role of safeguarding the issue related risks for the companies that are offering the shares for sale. Primary Market Processes: Primary markets are basically the platform where an investor gets the first opportunity to purchase a new security. The group or company that issues the security gets the money by selling a certain amount of securities.
Normally, the entire process of buying a primary market security involves involves several rules and regulations that have to be properly adhered to before a security can change hands. IPO or Initial Public Offering is one of the integral procedures of the primary markets. Through an IPO an organization announces annou nces the sale of its securities at a certain starting price. Investors can obtain news of upcoming shares onl y in the primary market. The issuing firm collects money, which is then used to finance its operations or expand business, b y selling its shares. Before selling a security on the primary market, the firm must fulfill all the requirements regarding the exchange. After trading in the primary market, the security will then enter the secondary market, where numerous trades happen every day. The primary market accelerates the process of capital formation in a country's economy. Experts have said that various operations in a primary market such as advices given to issuers and underwriting are similar to mergers and acquisitions. They also op ine that a primary market is an important source of revenue generation gene ration for investment banks. Methods of Issuing Securities in the Primary Market: There are three methods through which securities can be issued in the primary market:
Rights Issue,-
A public company that wants to raise capital can opt for a Public Issue or a Rights Issue.
Oftentimes they opt for latter, followed by former. In a rights issue, existing shareholders have the right to buy a specified number of new shares of the firm at a specified price within a specifie d time. Usually this price is below market price. The idea is to reward existing shareholders with an investment opportunity, which is perceived to be attractive.
Initial Public Offer (IPO), and- IPO Definition
Initial Public Offering. The first sale of stock of stock by a company to the public. Companies offering an IPO are sometimes new, young companies, or sometimes companies which have been around for many years but are finally deciding to go public. IPOs are often risky investments, but often have the potential for significant gains. IPOs are often used as a way for a young company to gain necessary market capital.
Preferential issue- A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under under Section Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue
A company's new offering is placed on the primary market through an initial public offer. Primary Market Volatility: Unpredictability is one of the major features of a primary market. They are normally more unstable compared to the secondary markets, which see majority of the trades in an exchange. The major reason behind this is the fact that it is difficult to precisely assess the levels of demand among investors for a security before a couple of days of trading. Primary Market Vs. Secondary Market: The basic difference between secondary and primary markets is that in case of the latter, an investor buys the securities directly from the organization that is providing them. Primary Markets Sales: There are several ways in which sales operations are conducted at the primary markets. Companies can provide their shares at face value or they can also be sold at discounted prices. Securities can be sold in both international and domestic markets. When a transaction is completed in a primary market, the issuing organiz ation provides the investors new security certificates. Primary Market Dealers: The dealers who operate at the primary markets receive commissions that are included in the prices at which the securities are offered. Importance of Primary Markets: Apart from their importance for the businesses, primary markets are also critical from a national perspective as they help to create capital.
What does capital market mean? How does the company raise funds in capital c apital market? Capital market is the market in which financial secu rities have been traded between the individuals and the institutions. These institutions sell securities on capital markets in public and private sectors to raise funds. This market is composed of both both primary and secondary markets. The parts of capital markets are both stock and bond markets. Large Corporation grow by doing innovations and by raising the capital to finance expansion. Corporations have five primary methods which are used to raise funds in capital market. 1) Issue of bonds : - Bond is an amount of money which has to be given at a certain date or dates in future. Bondholders receive interest payments at fixed rate and specific dates. Corporate issues bonds because interest rates which must pay investors are lower than rates of borrowing borrowing and holders can sell bonds to someone else before they due. 2) Issue of preferred stock : - company choose this to raise capital. If a company have financial trouble the buyers of shares gets special status. If profits are limited then owners will be paid the dividend after bondholders receive the interest payments. 3) Sell of common stock : - if financial condition of the company compan y is good then it can raise the capital issue the common stock. Bank helps h elps the companies to do the investment and issue stock. Investors’ gets interested if the company company pays large dividends and offers steady income. Value of shares increases if investor expects the corporate earning to rise. 4) Borrowing :- companies used to raise short term capital by g etting the loans from banks or other sources. After good market run the profits which the company gets can be used to finance their operating by retaining their earnings.
