CAPITAL CAPITAL MARKETMARKET

CAPITALCAPITAL MARKETMARKET Capital market is also known as Securities Capital market is also known as Securities

Market because long term funds are Market because long term funds are raised through trade on debt and equity raised through trade on debt and equity securities. These activities may be securities. These activities may be conducted by both companies and conducted by both companies and governments. This market is divided into:governments. This market is divided into:

primary capital market andprimary capital market and secondary capital market.secondary capital market.

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

Nature of capital marketNature of capital market The nature of capital market is The nature of capital market is

brought out by the following facts:brought out by the following facts: It Has Two SegmentsIt Has Two Segments It Deals In Long-Term SecuritiesIt Deals In Long-Term Securities It Performs Trade-off FunctionIt Performs Trade-off Function It Creates Dispersion In Business It Creates Dispersion In Business

OwnershipOwnership It Helps In Capital FormationIt Helps In Capital Formation It Helps In Creating LiquidityIt Helps In Creating Liquidity

Capital Market InstrumentCapital Market Instrument

Equities SharesEquities Shares Preference SharesPreference Shares BondsBonds Foreign Exchange marketForeign Exchange market Fixed depositFixed deposit Long term loanLong term loan DerivativesDerivatives

Equity SharesEquity Shares Equity shares signify ownership in a Equity shares signify ownership in a

corporation and represent claim over the corporation and represent claim over the financial assets and earnings of the financial assets and earnings of the corporation. Shareholders enjoy voting rights corporation. Shareholders enjoy voting rights and the right to receive dividendsand the right to receive dividends

This instrument is issued by companies only This instrument is issued by companies only and can also be obtained either in the and can also be obtained either in the primary market or the secondary market. primary market or the secondary market. 

The risk factor in this instrument is high and The risk factor in this instrument is high and thus yields a higher return (when successful)thus yields a higher return (when successful)

Nature of Equity SharesNature of Equity Shares

Voting rightVoting right High risk involveHigh risk involve Issue in both marketsIssue in both markets Higher returnHigher return

Advantages of equity sharesAdvantages of equity shares Right to Participate in the Right to Participate in the

Control and ManagementControl and Management Non recurring fixed paymentsNon recurring fixed payments OwnershipOwnership

Disadvantages of equity sharesDisadvantages of equity shares Trading on equity not possibleTrading on equity not possible No flexibility in capital structureNo flexibility in capital structure High costHigh cost Uncertain and Irregular IncomeUncertain and Irregular Income

Preference SharesPreference Shares . Preference shares allow an investor to own . Preference shares allow an investor to own

a stake at the issuing company with a a stake at the issuing company with a condition that whenever the company condition that whenever the company decides to pay dividends, the holders of the decides to pay dividends, the holders of the preference shares will be the first to be paid.preference shares will be the first to be paid.

The right to get back their capital before the The right to get back their capital before the equity holders in case of winding up of the equity holders in case of winding up of the company.company.

This instrument is issued by corporate This instrument is issued by corporate bodies. bodies.

Nature of preference shareNature of preference share

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

assetsassets

Advantages of preference shares :Advantages of preference shares : Fixed returnFixed return Less capital lossesLess capital losses Proper securityProper security Presence of preferential rightsPresence of preferential rights Fixed regular incomeFixed regular income

Disadvantages of preference shares :Disadvantages of preference shares :

Company point of view Company point of view –– High rate of dividendsHigh rate of dividends . Dilution of claim over assets. Dilution of claim over assets Increase in financial burdenIncrease in financial burden

BondsBonds

A contractual arrangement in which A contractual arrangement in which the issuer agrees to pay interest and the issuer agrees to pay interest and repay the borrowed amount after a repay the borrowed amount after a specified period of time is a debt specified period of time is a debt instrument.instrument.

Debt instruments with maturity more Debt instruments with maturity more than 5 years are called ‘bonds’than 5 years are called ‘bonds’

corporate or government are issue corporate or government are issue the bond.the bond.

Advantage of Bonds :Advantage of Bonds : fixed rate of interestfixed rate of interest safe and secure income safe and secure income Higher rate of returnHigher rate of return relatively low-risk investmentrelatively low-risk investment

Disadvantage of Bonds :Disadvantage of Bonds : No right to voteNo right to vote Exchange rate riskExchange rate risk

Foreign Exchange (Forex) Foreign Exchange (Forex) MarketMarket

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

Advantage of Foreign Exchange Advantage of Foreign Exchange Markets :Markets :

Transaction costs will be eliminated.Transaction costs will be eliminated. Price transparencyPrice transparency Uncertainty caused by Exchange rate Uncertainty caused by Exchange rate

fluctuations eliminatedfluctuations eliminated InflationInflation

Disadvantage :Disadvantage : The instability of the systemThe instability of the system Over estimation of Trade benefitsOver estimation of Trade benefits . Deflationary tendencies.. Deflationary tendencies.

Fixed DepositsFixed Deposits

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

Advantages of fixed deposits :Advantages of fixed deposits : Generally tend to offer higher Generally tend to offer higher

interest ratesinterest rates Lock in period is 6 monthsLock in period is 6 months Investor can diversify the amount in Investor can diversify the amount in

different companiesdifferent companies

Disadvantages :Disadvantages : They come with high They come with high riskrisk as they are as they are

not secured by any assets.not secured by any assets. Company FD have no deposit Company FD have no deposit

assurance as bank FD's up to assurance as bank FD's up to Rs.1,00,000 per individual your Rs.1,00,000 per individual your deposit are protected.deposit are protected.

Interest above Rs 5000 will be Interest above Rs 5000 will be subject to subject to tax deduction at source deduction at sourcePre-mature withdrawal of FD's are Pre-mature withdrawal of FD's are too complicatedtoo complicated

Long Term LoanLong Term Loan

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

AdvantagesAdvantages

1.1. There is a loan for just about anything. If There is a loan for just about anything. If you are in need of money to purchase a you are in need of money to purchase a house, you can apply for a housing loan.house, you can apply for a housing loan.

2.2. It helps a person afford an expensive It helps a person afford an expensive purchase.purchase.

3.3. Payment is staggered, which makes it Payment is staggered, which makes it affordable. This enables the person to pay affordable. This enables the person to pay off the loan gradually.off the loan gradually.

4.4. One gets the funding he needs. If a person One gets the funding he needs. If a person wants to start a business, he can do so by wants to start a business, he can do so by applying for a business loanapplying for a business loan

DisadvantagesDisadvantages

1. It is a long-term debt.1. It is a long-term debt.

2. If you miss payments, you will face 2. If you miss payments, you will face serious consequences. You can face serious consequences. You can face foreclosure or repossession of the foreclosure or repossession of the property.property.

3. You may not be able to make early 3. You may not be able to make early loan repayment. Few lenders give loan repayment. Few lenders give option for early repayment. Although option for early repayment. Although there are some who will allow you to do there are some who will allow you to do this, they will charge you with early this, they will charge you with early repayment fees.repayment fees.

DerivativesDerivatives Derivative securities are contracts which are Derivative securities are contracts which are

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

Some examples of derivatives are: Some examples of derivatives are:  Prices of commodities are uncertain - Prices of commodities are uncertain -

There are forwards, futures and There are forwards, futures and options on commodities.options on commodities.

Interest rates are uncertain - There Interest rates are uncertain - There are interest rate swaps and futures.are interest rate swaps and futures.

Foreign exchange rates are uncertain Foreign exchange rates are uncertain - There are exchange rate - There are exchange rate derivatives.derivatives.