CAPITAL MARKET

CAPITAL MARKET
Capital market is also known as Securities Market because long term funds are raised through trade on debt and equity securities. These activities may be conducted by both companies and governments. This market is divided into: primary capital market and secondary capital market.

The primary market is designed for the new issues and the secondary market is meant for the trade of existing issues. Stocks and bonds are the two basic capital market instruments used in both the primary and secondary markets.

Nature of capital market

The nature of capital market is brought out by the following facts: It Has Two Segments It Deals In Long-Term Securities It Performs Trade-off Function It Creates Dispersion In Business Ownership It Helps In Capital Formation It Helps In Creating Liquidity

Capital Market Instrument

Equities Shares Preference Shares Bonds Foreign Exchange market Fixed deposit Long term loan Derivatives

Equity Shares

Equity shares signify ownership in a corporation and represent claim over the financial assets and earnings of the corporation. Shareholders enjoy voting rights and the right to receive dividends This instrument is issued by companies only and can also be obtained either in the primary market or the secondary market. The risk factor in this instrument is high and thus yields a higher return (when successful)

Nature of Equity Shares

Voting right High risk involve Issue in both markets Higher return

Advantages of equity shares Right to Participate in the Control and Management Non recurring fixed payments Ownership Disadvantages of equity shares Trading on equity not possible No flexibility in capital structure High cost Uncertain and Irregular Income

Preference Shares

. Preference shares allow an investor to own a stake at the issuing company with a condition that whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid. The right to get back their capital before the equity holders in case of winding up of the company. This instrument is issued by corporate bodies.

Nature of preference share

Not right to voting pay dividends at fixed rate right to be paid company assets first. greater claim on the company's assets

Advantages of preference shares : Fixed return Less capital losses Proper security Presence of preferential rights Fixed regular income Disadvantages of preference shares : Company point of view High rate of dividends . Dilution of claim over assets Increase in financial burden

Bonds

A contractual arrangement in which the issuer agrees to pay interest and repay the borrowed amount after a specified period of time is a debt instrument. Debt instruments with maturity more than 5 years are called bonds corporate or government are issue the bond.

Advantage of Bonds : fixed rate of interest safe and secure income Higher rate of return relatively low-risk investment Disadvantage of Bonds : No right to vote Exchange rate risk

Foreign Exchange (Forex) Market

Foreign Exchange Market or Forex market is a place where international currencies are traded. It has emerged to be the largest and decentralized financial market operating globally. It does not have any central authority and hence it is called an "Over The Counter" (OTC) market. It allows the traders to buy, sell, exchange and speculate on currencies.

Advantage of Foreign Exchange Markets :

Transaction costs will be eliminated. Price transparency Uncertainty caused by Exchange rate fluctuations eliminated Inflation Disadvantage : The instability of the system Over estimation of Trade benefits . Deflationary tendencies.

Fixed Deposits
The term Fixed Deposit Account refers to a type of savings account or certificate of deposit where deposits are made for a specified period of time and that pay out a fixed rate of interest.

Advantages of fixed deposits : Generally tend to offer higher interest rates Lock in period is 6 months Investor can diversify the amount in different companies

Disadvantages : They come with high risk as they are not secured by any assets. Company FD have no deposit assurance as bank FD's up to Rs.1,00,000 per individual your deposit are protected. Interest above Rs 5000 will be subject to tax deduction at source Pre-mature withdrawal of FD's are too complicated

Long Term Loan

A form of debt that is paid off over an extended time frame that exceeds one year in duration. Obtaining a long term loan provides a business with working capital that it can use to purchase assets, inventory or equipment which can then be used to create additional income for the business.

Advantages
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There is a loan for just about anything. If you are in need of money to purchase a house, you can apply for a housing loan. It helps a person afford an expensive purchase. Payment is staggered, which makes it affordable. This enables the person to pay off the loan gradually. One gets the funding he needs. If a person wants to start a business, he can do so by applying for a business loan

Disadvantages
1. It is a long-term debt. 2. If you miss payments, you will face serious consequences. You can face foreclosure or repossession of the property. 3. You may not be able to make early loan repayment. Few lenders give option for early repayment. Although there are some who will allow you to do this, they will charge you with early repayment fees.

Derivatives

Derivative securities are contracts which are written between two parties and whose value is derived from the value of underlying widely-held and easily marketable assets such as agriculture and other physical (tangible) commodities or currencies or short term and long term financial instruments or intangible things like commodities price index (inflation rate), equity price index or bond price index. It is also known as deferred delivery or deferred payment instruments

Some examples of derivatives are: Prices of commodities are uncertain There are forwards, futures and options on commodities. Interest rates are uncertain - There are interest rate swaps and futures. Foreign exchange rates are uncertain There are exchange rate derivatives.