Capital Market

 A market in which individuals and institutions trade

financial securities. Organizations/institutions in the
public and private sectors also often sell securities on
the capital markets in order to raise funds. Thus, this
type of market is composed of both the primary and
secondary markets.
 Capital markets are financial markets for the buying and
selling of long-term debt- or equity-backed securities.
These markets channel the wealth of savers to those
who can put it to long-term productive use, such as
companies or governments making long-term
investments.
• Capital Market is where trading in financial
instruments is conducted to raise capital.
 Three categories of participants:
i) Issuer of securities: Borrowers or deficit savers
who issue securities to raise funds(corporate sector,
central government).
ii) Investors: Surplus savers who deploy savings by
subscribing to these securities(include retail
investors, mutual funds).
iii) The Intermediaries: Agents who match the need of
the users and suppliers of funds.
 Nature Of Capital Market
The nature of capital market is brought out by the
Following facts:
Its has two segments primary and secondary
market.
It performs trade-off function.
It deals in long-term securities.
It helps in creating liquidity.
It creates dispersion in business ownership.
It helps in capital function.
 Role and Function of Capital Market
 Capital Formation
 Avenue Provision of Investment
 Speed up Economic Growth and
Development
 Mobilization of Savings
 Proper Regulation of Funds
 Service Provision
 Continuous Availability of Funds
 Factors affect the Capital Market
• Economy of the Country
• Money Supply
• Interest Rate
• Corporate Results
• Global Capital Market Scenario
• Foreign Funds Inflow
• Strength/Weakness of the local currency
 Types of capital market
There are two types of capital market:

1. Primary market
2. 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.
 Classification of Capital Marketing
CAPITAL MARKET

SECONDARY
PRIMARY MARKET
MARKET

PUBLIC RIGHT BONUS PRIVATE

STOCK MARKET
ISSUE ISSUE ISSUE PLACEMENT
 Primary Market
 In Primary Market, Securities are offered to the public for subscription, for the
purpose of raising the capital or funds.
 The issue of securities in the primary market is subjected to fulfillment of a
number of pre-issue guidelines by SEBI and compliance to various provision of
the Company Act.
 An unlisted issuer making a public issue i.e. (making an IPO) is required to
satisfy the following provisions:
The Issuer Company shall meet the following requirements:
(a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full
years.
(b) Distributable profits in at least three of the immediately preceding five years.
(c) Net worth of at least Rs. 1 Crore in each of the preceding three full years.
(d) If the company has changed its name within the last one year, at least 50%
revenue for the preceding 1 year should be from the activity suggested by the
new name.
(e) The issue size does not exceed 5 times the pre‐ issue net worth as per the
audited balance sheet of the last financial year.
MONEY MARKET: It is the market for short term
funds i.e. Up to one year maturity; or it is the market
for lending and borrowing of short term funds.

 It consists of :
• Call money market: The call money market deals
in short term finance repayable on demand, with a
maturity period varying from one day to 14 days. It
is done mostly by commercial banks.

• Bill market: Treasury bills are instrument of short-

term borrowing by the Government of India, issued
as promissory notes under discount.
• 364 days bill market: The 364 day treasury bills have thus become an
important instrument of government borrowing from market and also leading
money market instrument in the sense that their yield is most reflective of
market condition. Financial institutions recognise the yield rate on 364 days.

• Certificate of Deposit(COD): It is a instrument of borrowing by

commercial for a minimum period of 3 month and a maximum of 1 year in a
multiples of 25 lakhs. The minimum value is reduced and and is presently 1
lakh. It is issue on at a discount to face value. And discount rate is freely
determined according to the market conditions.

• Commercial Papers (CPs): Commercial Paper is the short term unsecured

promissory note issued by corporate and financial institutions at a discounted
value on face value. They come with fixed maturity period ranging from 3 to 6
months. It is issued by companies with a net worth of 10 cr later reduced to 5 cr.
It is issued in multiple of 25 lakhs subject to minimum issue of 1 cr.
• Repos and Reverse repos:
 Repos: The rate at which the RBI lends money
to commercial banks is called repo rate, a short
term for repurchase agreement. A reduction in
the repo rate will help banks to get money at a
cheaper rate. When the repo rate increases
borrowing from RBI becomes more expensive.
 Reverse repos: To sell dated government
securities through auction at fixed cut-off rate of
interest. The objective is to provide short term
avenue to bank to park their Surplus funds when
there is considerable liquidity in money market.
 Classification of Issues
ISSUES
PRIVATE
RIGHT PLACEMENT

PUBLIC
INITIAL FURTHER
PUBLIC PUBLIC
OFFERING OFFERING

FRESH OFFER FRESH OFFER FOR

ISSUE FOR SALE ISSUE SALE
 Classification of Issue
PUBLIC ISSUE :
It involves raising of funds directly from the public and get
themselves listed on the stock exchange.
 In case of new companies ,the face value of the securities is issue at
par; and
 In the case of existing companies, the face value of securities are
issued at premium.
 Initial public offer (IPO): When an unlisted company makes either
a fresh issue of securities or offers its existing securities for sale or
both for the first time to the public, it is called an IPO. This paves
way for listing and trading of the issuer’s securities in the Stock
Exchanges.
 Further public offer (FPO): When an already listed company
makes either a fresh issue of securities to the public or an offer for
sale to the public, it is called a FPO.
 Cont…
 RIGHT ISSUE:
Right issue is the method of raising additional finance from existing
members by offering securities to them on pro rata bases. The rights offer
should be kept open for a period of 60 days and should be announced within
one month of the closure of books.

 BONUS ISSUE:
 Companies distribute profits to existing shareholders by way of fully paid
bonus share in lieu of dividend.
 These are issued in the ratio of existing shares held.
 The shareholders do not have to make any additional payment for these
shares.

 PRIVATE PLACEMENT:
Private Placement is an issue of shares by a company to a select group of
persons under the Section 81 of the companies act 1956. It is a faster way
for a company to raise equity capital.
 Secondary Market
 Secondary 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.
 It is the trading avenue in which the already
existing securities are traded amongst investors.
 Banks facilitate secondary market transactions by
opening direct trading and demat accounts to
individuals and companies.
 Cont…

 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.

• Secondary market comprises of Equity market and

Debt market.
 Financial instruments dealt in
secondary market
 Equity Shares:
 An equity share is commonly referred to as an ordinary share.
 It is an form of fractional ownership in which a shareholder, as a
fractional owner, undertakes the entrepreneurial risk associated with
the 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.
 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.
 Cont…
 Preference shares:
 These shareholder do not have voting rights.
 Owners of these shares are entitled to a fixed dividend or a
dividend calculated at a fixed rate to be paid regularly before any
dividend can be paid in respect of equity shares.
 These shareholders also enjoy priority over the equity
shareholders in the payment of surplus.
 Cumulative Preference Shares:
 This is a type of preference shares on which dividend
accumulates if it remains unpaid.
 Cumulative Convertible Preference Shares:
 This is a type of preference shares on where the dividend payable
on the same accumulates, if not paid. After a specified date, these
shares will be converted into equity capital of the company.
 Derivative Market
• Derivatives are synthetic instruments.
• They derive value from an underlying asset
class.
• Asset classes range from financial instruments
to commodities to even classes such as weather
and industrial effluents.
• However the common underlying theme of
derivatives is that they are leveraged products
• Derivatives are not always priced at respective
asset value (fair value).
 Derivative Positions and Types of
Derivative Market Players
• Naked open position taking a directional call
on the markets
• Hedge against underlying asset class
• Arbitrage position within an asset class
• Speculators
• Hedgers
• Arbitrageurs
 Underlying Asset Class
• It is important to understand the underlying
asset class before using derivatives.
• Asset classes can be classified into two broad
categories- financial which includes currencies
and commodities.
• Financial asset classes can be broadly
categorised into interest rates, equities and
currencies.
• Commodities range from agricultural
commodities to minerals and metals.
 Financial Asset Classes
• Broadly categorized into equity, interest rates and
currencies.
• Equity as an asset class will include single stocks
and equity indices.
• Interest rates as an asset class will include
government bonds, government bond benchmarks
and money market benchmarks.
• Currencies as an asset class will include currency
pairs such as USD/INR, USD/JPY etc.
• Credits as defined by corporate bonds can also be
categorized into financial assets and derivatives on
them are called credit derivatives.
 Equity Derivatives
• Equity derivatives can be classified into single
stock derivatives and index derivatives.
• Single stock derivatives are derivatives on
specific stocks eg. Reliance.
• Index derivatives are derivatives on stock
exchange indices eg- Nifty.
• Hybrid derivatives on equity include
convertible shares (partly or fully).
• Employee stock options are also equity
derivatives.
 Interest Rate Derivatives
 Interest rate derivatives have many different
types:
• Derivatives on government bonds
• Derivatives on bond indices/ benchmark
• Derivatives on short term money market
benchmarks
Examples: Bond futures and interest rate swaps based
on benchmarks such as libor/ mibor.
 Currency Derivatives
• Currency derivatives are based on currency
pairs.
• Currency forwards and options eg- USD/INR
forwards and options.
• Currency derivatives are combined with
interest rate derivatives to offer exotics.
• Exotics include principle only swaps, currency
swaps.
 Derivative Exchanges
• Derivative exchanges are separate from stock
exchanges.
• In US CBOT and CME are the largest
exchanges for derivatives.
• In UK LIFFE is the premier derivative
exchange.
• In India NSE is the largest equity derivative
exchange while commodity exchanges are
NCDEX and MCX.
 Hedging or Leveraging
• Derivatives are viewed as a hedging instrument.
• The holder of an underlying asset can hedge
fluctuations in prices of the asset using
derivatives.
• However derivatives are increasingly being
used for taking up leveraged positions in an
underlying asset.
• This enables higher returns for taking on higher
risk.
 Mutual Fund

• Form of trust that pools the funds of a whole lot

of investors to make more money by investing in
an array of financial instruments.

• Advantages of a Mutual Fund:

– Professional Management
– Diversification
– Flexibility in choice - selection, redemption
– Low costs
– Transparency
 Types of funds
• Open ended fund
• Close ended fund
• Interval fund
• Debt fund
• Equity fund
• Hybrid fund
• Other funds
 Commodity Market
A commodity is any good or service produced by
human labor and offered as a product for general sale
on the market .
 Characteristics: Commodity is anything movable (a
good) that has following characteristics:
• Fungible, i.e. the same no matter who produces it
• Derivatives, i.e. involves further processing into
number of products
• Economic cost, i.e. production of it involves some
cost
Classification of Commodities
Commodity Trading Instruments
There are a variety of basic types of
instruments traded in commodity
marketplaces:
• “Spot” contracts
• “Cash market” contracts
• Forward contracts
• Futures contracts
• Options
 Commodity – Indian Structure

FMC – THE REGULATOR

COMMODITY EXCHANGE

NATIONAL REGIONAL
EXCHANGES EXCHANGES

20 OTHER
NCDEX NMCE MCX NBOT REGIONAL
EXCHANGES
 Reasons for Investing in Commodities
 Commodity provides true diversification in financial portfolio.

 Commodity act as hedge against risks involved in business.

 Rising income will ensure Inflation which in turn will ensure bull market
in commodities.

 Explosion of population and shrinking agricultural land would leave

commodity scarce.

 Returns chasing funds & investors (traders, investor &HNI) will make it
vibrant.

 Consumption / Spending in infrastructure / GDP growth will lead to

depletion of metals.

 Secular bull market in commodities is likely to continue.

 Stock Exchange
‘Stock Exchange’ denotes a place where
stocks, shares and other securities are
bought and sold. In other words, a stock
exchange is any organization or a group
of persons which constitutes, maintains
or provides a market place or facilities
for bringing together purchasers and sellers
of securities.
 STOCK
EXCHANGES
IN INDIA
 Functions of Stock Exchange
 Motivates individual to save and invest funds.

 A safe and productive channels for investment of

savings.

 Provides liquidity to the savings of the investors,

by developing a secondary capital market.

 Meeting the large capital needs of organized

industry, trade and business.
Legal Framework
Securities Contracts (Regulation) Act, 1956

 It provides for direct and indirect control

of virtually all aspects of securities trading
and the running of stock exchanges and aims
to prevent undesirable transactions in
securities. It gives SEBI regulatory
jurisdiction over
(a) stock exchanges through a process of
recognition and continued supervisions.
(b) contracts in securities.
(c) listing of securities on stock exchange.
 Objectives of Securities Contracts
(Regulation) Act, 1956

• To provide for the regulation of stock exchanges.

• To provide for the regulation of transactions in securities.

• To prevent undesirable speculations in securities.

• To regulate the buying and selling of securities outside the

limits of stock exchanges.

• To provide for ancillary matters.

 Important SEBI Regulations
• SEBI ( ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS)
Regulations, 2009
• SEBI ( ISSUE AND LISTING OF DEBT SECURITIES) Regulations,
2008.
• SEBI ( PROHIBITION OF INSIDER TRADING ) Regulations, 1992
• SEBI ( MERCHANT BANKERS ) Regulations, 1992
• SEBI ( UNDERWRITERS ) Regulations, 1993
• SEBI ( REGISTRARS TO AN ISSUE AND SHARE TRANSFER
AGENTS ) Regulations, 1993
• SEBI ( BANKERS TO AN ISSUE ) Regulations, 1994
• SEBI ( SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS
) Regulations 1997 (Takeover Code)
• SEBI ( PROHIBITION OF FRADULENT AND UNFAIR TRADE
PRACTICES RELATING TO SECURITIES MARKET ) Regulations, 2003
Thank you