CAPITAL

MARKETS

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

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
It Is Related Market
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.

If an individual has bought

some security and he now
wants to sell it, he can do so
.
through
the medium of stock
exchange to sell or purchase
through the medium of stock
exchange requires the services
of the broker presently, their
are 24 stock exchange in India.

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.

INDIAN CAPITAL MARKET

TheIndian Capital Marketis one of the oldest capital markets

in Asia which evolved around 200 years ago.
Chronology of the Indian capital markets
>1830s:Trading of corporate shares and stocks in Bank
and cotton Presses in Bombay.
>1850s:Sharp increase in the capital market brokers
owing to the rapid development of commercial enterprise.

>1860-61:Outbreak of
theAmerican Civil Warand
'Share Mania' in India.
>1894:Formation of
theHamada Shares and Stock
Brokers Association.
>1908:Formation of
theCalcutta Stock Exchange
Association.

The pattern of growth in the

Indian capital markets in the
post independence regime can
be analyzed from the following
graphs:

From the above graph we find

that the number of stock
exchanges in India increased
at a crawling pace till 1980
but witnessed a sharp rise
thereafter till 1995.

The following diagram shows the

trend in the no. of listed
companies participating in
theIndian Capital Market. Here
again we register a sharp rise
after 1980. The number of stocks
issued by the listed companies
also shows a similar trend:

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

Capital market investmenttakes place through thebond

marketand INVESTMENT
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-end-funds
or the unit investment trusts.
Another way of investing directly in the bond issue is
theExchange-traded-funds.
The capital market investment in the bond market is done
by:
Institutional investors
Governments, traders and
Individuals.