CAPITAL MARKET

Specialized Financial Institutions

Faisal Javaid
Ph.D. scholar Finance
University of Gujrat Sialkot
faisal.javed@uogsialkot.edu.pk

CAPITAL MARKET
The

market where investment

instruments like bonds, equities
and mortgages are traded is
known as the capital market.
The primal role of this market is to
make investment from investors
who have surplus funds to the
ones who are running a deficit.

The capital market offers both long term

and overnight funds.
The different types of financial instruments
that are traded in the capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange instruments,
> hybrid instruments and
> derivative instruments.

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

Role of Capital Markets

Mobilization of long-term resources

(capital raising avenue for corporates) &
investment avenue of investors including
retail
Intermediation Function- Distribution of
these resources & investments in various
viable projects
Mechanism of entry and exit in a quick
and transparent manner

Types of capital market

There are two types of capital
market:
Primary market,
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.

In this market, the flow of funds is

from savers to borrowers (industries),
hence, it helps directly in the capital
formation of the country.
The money collected from this
market is generally used by the
companies to modernize the plant,
machinery and buildings, for
extending business, and for setting
up new business unit.

Features of Primary
Market
It Is Related With New Issues

It Is Related With New Issues

It Has No Particular Place
It Has Various Methods Of Float Capital:
Following are the methods of raising
capital in the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
It comes before Secondary Market

Secondary Market

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.

Features of Secondary
Market

It Creates Liquidity
It Comes After Primary Market
It Has A Particular Place
It Encourage New Investments

CAPITAL MARKET RISK

Investment in long term

financial instruments is
accompanied by high capital
market risks. Since there are two
types of capital markets- the
stock market and the bond
market.
So risks are present in both the
market.

Risk in the Stock Market

Stock prices keep fluctuating
over a wide range unlike the bank
deposits or government bonds.
The efficient market hypothesis
shows the effect of fundamental
factors in changing the price of
the stock market.

 The

Efficient Market Hypothesis

shows that all price movements are
random whereas there are plenty
of studies that reflect the fact that
there is a specific trend in the stock
market prices over a period of
time.
Research has shown that there are
certain psychological factors that
shape the stock market prices.

Sometimes the market behaves

illogically to any economic news.
The stock market prices can be diverted
in any direction in response to press
releases, rumors and mass panic.

The stock market prices are also

subject to speculation. In the short run
the stock market prices may be very
volatile due to the occurrences of the
fast market changing events.

Risk in the Bond Market

Capital market risk in the bond

market arises due to interest rate
changes. There is an inverse
relationship existing between the
interest rate and the price of the
bond. Hence the bond prices are
sensitive to the monetary policy of
the country as well as economic
changes.

Risks in Fixed Income

Securities

Interest Rate Risk

Reinvestment Risk
Credit Risk
Event Risk
Inflation Risk

Fixed Income Security

Fixed Income Security

CAPITAL MARKET REPORT

TheCapital Market Reportis
prepared by thecapital market
analystsand is of various types.
There are four different kinds
ofcapital market reports: >10-K
Reports,
>10-Q Reports,
>Form 8-K Reports,
>the Proxy Statements.

10-K Reports

This is a kind ofannual reportof the

company that contains information of the
company's business, finances and
management.
This informs us about the bylaws of the
company, other legal documents and the
lawsuits that the company may have a hand in.

10-Q Reports or the Quarterly Reports

The quarterly reports are the abridged form

of the annual reports.
They are issued at an interval of three months.
They consist offinancial statementsand list the
material events that have occurred in the
company.

Form 8 K Report

The companies that are publicly

traded are required to maintain the
Form 8-K where they record any
material eventthat might have affected
the financial status of the company

Proxy Statements

The proxy statement consists of

business issues that need to be
discussed in the meeting and a ballot
for voting for the purpose of forming the
new Board of directors.

CAPITAL MARKET
INVESTMENT

Capital market investmenttakes place

through thebond marketand thestock
market.
The capital market is basically the
financial pool in which different companies
as well as the government can raise long
term funds.
Capital market investmentthat takes
place through the bond and the stock
market may be elucidated in the following
heads.

Capital market investments in the stock

market
The stock market is basically the trading
groundcapital market investmentin the
following:
i) Companys stocks
ii) Derivatives
iii) Other securities
The capital market investments in the stock
market take place by:
1) Small individual stock investors
2) Large hedge fund traders.
The capital market investments can occur
either in:
1) Thephysical marketby a method known
as the open outcry.

2) Trading can also occur in thevirtual

exchangewhere trading is done in the
computer network.
The investors in the stock market have the
liberty to buy or sell the stock that they are
holding at their own discretion unlike the case
ofgovernment securities, bonds or real estate.
The stock exchanges basically function as
theclearing house for such liquid transactions.
The capital market investments in the stock
market are also done through the derivative
instruments like thestock optionsand
thestock futures.

Capital Market Investments in the Bond

Market
The bond market is afinancial
marketwhere the participants buy and
selldebt securities.
The bond market is also differently known as
the debt, credit or fixed income market.
There are different types of bond markets
based on the different types of bonds that
are traded. They are:
Corporate,
Government and agency,
Municipal,
Bonds backed by mortgages & assets,
Collateralized Debt Obligation.

The bonds, except for the corporate

bonds do not have formal exchanges
but are tradedover-the- counter.
Individual investors are attracted to the
bond market and make investments
through thebond funds, closed-endfunds or the unit investment trusts.
Another way of investing directly in the
bond issue is theExchange-tradedfunds.
The capital market investment in the
bond market is done by:
Institutional investors
Governments, traders and
Individuals.