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  1. 1. CAPITAL MARKET Mr. Vikash Barnwal Assistant Professor Faculty of business studies Kashi institute of technology
  2. 2. CAPITAL MARKET  Capital market is a place where buyers and sellers indulge in trade (buying/selling) of financial securities like bonds, stocks, etc. The trading is undertaken by participants such as individuals and institutions.  Capital market trades mostly in long-term securities. The magnitude of a nation’s capital markets is directly interconnected to the size of its economy which means that ripples in one corner can cause major waves somewhere else.
  3. 3. Features/Characteristics of Capital Market: 1. Link between savers and investors: The capital market acts as an important link between savers and investors  The savers (lenders of funds)  investors (borrowers of funds)  The savers who do not spend all their income are called “Surplus units”  the investors/borrowers are known as “deficit units”.  The capital market is the transmission mechanism between surplus units and deficit units. It is a conduit through which surplus units lend their surplus funds to deficit units. 2. Deals in Long Term fund:  Capital market provides funds for long and medium term.  It does not deal with channelizing saving for less than one year.
  4. 4. 3. Utilizes Intermediaries: Capital market makes use of different intermediaries such as a) brokers b) underwriters c) depositories etc. These intermediaries act as working organs of capital market and are very important elements of capital market and are very important elements of capital market. 4. Capital formation: The capital market prides incentives to savers in the form of interest or dividend to transfer their surplus fund into the deficit units who will invest it in different businesses. The transfer of funds by the surplus units to the deficit units leads to capital formation.
  5. 5. 5. Government Rules and Regulations:  The capital market operates freely but under the guidance of government policies.  These markets function within the framework of government rules and regulations e.g., stock exchange works under the regulations of SEBI which is a government body.
  6. 6. An ideal capital market is one: 1. Where finance is available at reasonable cost. 2. Which facilitates economic growth. 3. Where market operations are free, fair, competitive and transparent. 4. Must provide sufficient information to investors. 5. Must allocate capital productively
  7. 7. Importance or Functions of Capital Market: The capital market plays an important role in mobilizing saving and channel them into productive investments for the development of commerce and industry. As such, the capital market helps in capital formation and economic growth of the country. We discuss below the importance of capital market. 1. Link between savers and investors: 2. Basis for industrialization: 3. Accelerating the pace of growth: 4. Generating liquidity: 5. Increase the national income: 6. Productive investment 7. Stabilization of the value of securities: 8. Capital formation:
  8. 8. 1. Link between savers and investors:  The capital market acts as an important link between savers and investors.  The savers are lenders of funds while investors are borrowers of funds.  The savers who do not spend all their income are called “Surplus units” and  the investors/borrowers are known as “deficit units”.  The capital market is the transmission mechanism between surplus units and deficit units. It is a conduit through which surplus units lend their surplus funds to deficit
  9. 9. Basis for industrialization:  Capital market generates long term funds, which are essential for the establishment of industries. Thus, capital market acts as a basis for industrialization. Accelerating the pace of growth: Easy and smooth availability of funds for medium and long period encourages the entrepreneurs to take profitable ventures/businesses in the field of trade, industry, commerce and even agriculture. It results in the all round economic growth and accelerates the pace of economic development
  10. 10. Generating liquidity: Liquidity means convertibility into cash. Shares of the public companies are transferable i.e., in case of financial requirements these shares can be sold in the stock market and the cash can be obtained. This is how capital market generates liquidity. Increase the national income: Funds flow into the capital market from individuals and financial intermediaries which are absorbed by commerce, industry and government. It thus facilitates the movement of stream of capital to be used more productively and profitability to increase the national income. Capital formation: The capital market prides incentives to savers in the form of interest or dividend to transfer their surplus fund into the deficit units who will invest it in different businesses. The transfer of funds by the surplus units to the deficit units leads to capital formation.
  11. 11. Productive investment: The capital market provides a mechanism for those who have savings transfer their savings to those who need funds for productive investments. It diverts resources from wasteful and unproductive channels such as gold, jewelry, conspicuous consumption, etc. to productive investments. Stabilization of the value of securities: A well developed capital market comprising expert banking and non-banking intermediaries brings stability in the value of stocks and securities. It does so by providing capital to the needy at reasonable interest rates and helps in minimizing speculative activities.
  12. 12.  Encourages economic growth: The capital market encourages economic growth. The various institutions which operate in the capital market give quantities and qualitative direction to the flow of funds and bring rational allocation of resources. They do so by converting financial assets into productive physical assets. This leads to the development of commerce and industry through the private and public sector, thereby encouraging/ inducing economic growth.
  13. 13. Government Securities Market : This is also known as the Gilt-edged market. This refers to the market for government and semi-government securities backed by the Reserve Bank of India (RBI). Industrial Securities Market : This is a market for industrial securities i.e. market for shares and debentures of the existing and new corporate firms.  Buying and selling of such instruments take place in this market. This market is further classified into two types such as the New Issues Market (Primary) and the Old (Existing) Issues Market (secondary).  In primary market fresh capital is raised by companies by issuing new shares, bonds, units of mutual funds and debentures.  However in the secondary market already existing i.e old shares and debentures are traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock exchanges.  Bombay Stock Exchange (BSE),  the National Stock Exchange (NSE) and  Over The Counter Exchange of India (OTCEI).
  14. 14.  Development Financial Institutions (DFIs) : This is yet another important segment of Indian capital market. This comprises various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up.  Financial Intermediaries : The fourth important segment of the Indian capital market is the financial intermediaries. This comprises various merchant banking institutions, mutual funds, leasing finance companies, venture capital companies and other financial institutions.
  15. 15. SEBI Regulates Indian Capital Market  For the smooth functioning of the capital market a proper coordination among above organizations and segments is a prerequisite.  In order to regulate, promote and direct the progress of the Indian Capital Market, the government has set up 'Securities and Exchange Board of India' (SEBI).  SEBI is the supreme authority governing and regulating the Capital Market of India.
  16. 16. Types of Capital Market  Primary Market : Primary market is the market for new shares or securities. A primary market is one in which a company issues new securities in exchange for cash from an investor (buyer).It deals with trade of new issues of stocks and other securities sold to the investors.  Secondary Market :Secondary market deals with the exchange of prevailing or previously-issued securities among investors. Once new securities have been sold in the primary market, an efficient manner must exist for their resale. Secondary markets give investors the means to resell/ trade existing securities. Another important division in the capital market is made on the basis of the nature of security sold or bought, i.e. stock market and bond market.
  17. 17. Capital Market Instruments There are mainly two types of instruments that are traded in the capital market, which are:  Stocks: Stocks are sold and bought over a stock exchange, They represent ownership in the company and the buyer of the share is referred as the shareholder.  Bonds: The debt securities which are traded in the capital market are known as the bonds. Companies issue bonds for in order to raise capital foe the expansion of the business and growth.
  18. 18. New Issue Market (Primary Market)  When a company issues their new stocks or bonds in the market for selling, it is called a new issue market.  The stocks are issued in the market, and investors buy those stocks from the online or offline market.  The companies issue their stocks to get some capital to run their business. The stocks can be issues of old or new companies. Type of Issue 1. I.P.O (Initial Public issue) issued by Unlisted company (first time) 2. F.P.O (Further Public issue) issued by listed company (Further issued)
  19. 19. Types of New Issue Market  1. Public Issue  2. Offer for Sale  3. Private Placement  4. Right Issue  5. Book Building
  20. 20. 1. Public Issue:  The company that issues its stocks offers them directly to the public. The company offers a fixed number of shares, and capital is mentioned in the company’s prospectus.  When the company issues its share in the market, interested investors take the company’s prospectus.  In the prospectus, investors can see details of the company, which will help the investor to decide. The organization guarantees the issue shares at the market value.  The public can know everything about the company in the prospectus, such as authorized capital, name of brokers, underwriters, and bankers. 2. Offer for Sale  The company sells its shares through brokers or issue houses. The sale of shares of the company is guaranteed by the underwriters.  The companies offer shares to the brokers at lower prices, and brokers earn huge interest by selling the shares.  There is a difference in the price of the company shares and the price at which investors buy. It is because the brokers offer shares to the public at high prices.
  21. 21. 3. Private Placement  Some investors are involved in private placements, such as insurance companies, mutual funds, and banks. In the public issue, the shares are issued to the public, but it doesn’t happen in a private placement.  In private placement, there is no role of underwriters and prospectus. The brokers and issue houses take responsibility for selling the company’s shares. 4. Right Issue  When an old company that already has shareholders wants to release more shares in the market is called the right issue.  The company takes permission from SEBI and then issues its right shares in the market. 5. Book Building  The underwriter analyzes the demand and supply of the company shares during the initial public offering. In book building, the company invites bids from merchants to sell their shares instead of offering shares to the public.  After buying the shares, it is the responsibility of the merchant to sell the shares of the company. The companies sell their shares to professional and qualified merchant bidders.
  22. 22. Features of New issue Market  1. The new issue market is related to new issues. When an old or new company sells a fixed number of shares which is called Initial public offering(IPO).  2. Another feature of the new issue market is new issues are offered in the market, but there is no specific place to issue the shares.  3. New issue market has numerous methods of floating capital such as an offer for sale, public issue, and private placement.
  23. 23. Functions of New Issue Market
  24. 24. Origination The agencies investigate, analyze and process new proposals. The agencies study the legal, technical, and economical aspects of issuing companies. To succeed in issuing shares, specialized agencies analyze the time of floating of an issue, price, and types of issues. Underwriting It is a kind of guarantee taken by the company that they are issuing fixed numbers of shares in the market. The subscription gets guaranteed even if the public does not buy the shares. Distribution and Mechanics of Floating New Issues The role of a new issue market is to sell their shares to the brokers, and brokers sell them in the market. The brokers maintain the list of clients who invest in the company shares. Functions of New Issue Market
  25. 25. ROLE OF CAPITAL MARKET  Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner.  Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.  Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy.
  26. 26. • Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. • Capital Formation: Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. • Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public.
  27. 27. REFORMS IN CAPITAL MARKET  The major reforms undertaken in capital market of India includes:- • Establishment of SEBI : The Securities and Exchange Board of India (SEBI) was established in 1988. It got a legal status in 1992. SEBI was primarily set up to regulate the activities of the merchant banks, to control the operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a regulatory authority of new issue activities ofcompanies. The main functions of SEBI are:-  To regulate the business of the stock market and other securities market.  Topromote and regulate the self regulatory organizations.  Toprohibit fraudulent and unfair trade practices in securities market.  To promote awareness among investors and training of intermediaries about safety of market.  Toprohibit insider trading in securities market.  Toregulate huge acquisition of shares and takeover of companies.
  28. 28. • Increasing of Merchant Banking Activities : Many Indian and foreign commercial banks have set up their merchant banking divisions in the last few years. These divisions provide financial services such as underwriting facilities, issue organising, consultancy services, etc. It has proved as a helping hand to factors related to the capital market. • Candid Performance of Indian Economy : In the last few years, Indian economy is growing at a good speed. It has attracted a huge inflow of Foreign Institutional Investments (FII). The massive entry of FIIs in the Indian capital market has given good appreciation for the Indian investors in recent times. Similarly many new companies are emerging on the horizon of the Indian capital market to raise capital for their expansions. • Growing Mutual Fund Industry : The growing of mutual funds in India has certainly helped the capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms have launched many new funds. A big diversification in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the common investors to enter the capital market.
  29. 29. Investor's Protection : Under the purview of the SEBI the Central Government of India has set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the interest of the small investors from frauds and malpractices in the capital market. Growth of Derivative Transactions : Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it also introduced the future and options transactions. These innovative products have given variety for the investment leading to the expansion of the capital market. Insurance Sector Reforms : Indian insurance sector has also witnessed massive reforms in last few years. The Insurance Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the private insurance firms in India. As many insurance companies invest their money in the capital market, it has expanded. Commodity Trading : Along with the trading of ordinary securities, the trading in commodities is also recently encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is growing at a splendid rate.
  30. 30. • Establishment of Creditors Rating Agencies : Three creditors rating agencies viz. The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market activities. It is a guide for the investors also in evaluating the risk of their investments. • Rising Electronic Transactions : Due to technological development in the last few years. The physical transaction with more paper work is reduced. Now paperless transactions are increasing at a rapid rate. It saves money, time and energy of investors. Thus it has made investing safer and hassle free encouraging more people to join the capital market.
  31. 31. 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
  32. 32.  Definition: This is the market wherein the trading of securities is done. Secondary market consists of both equity as well as debt markets.  Securities issued by a company for the first time are offered to the public in the primary market. Once the IPO is done and the stock is listed, they are traded in the secondary market. The main difference between the two is that in the primary market, an investor gets securities directly from the company through IPOs, while in the secondary market, one purchases securities from other investors willing to sell the same. Equity shares, bonds, preference shares, treasury bills, debentures, etc. are some of the key products available in a secondary market. SEBI is the regulator of the same.
  33. 33. Features of Secondary Market  A market for securities- It is a wholesome market where securities of government, corporate companies, semi-government companies are bought and sold.  Second-hand securities- It associates with bonds, shares that have already been announced by the company once previously.  Regulate trade in securities- The exchange does not sell and buy bonds and shares on its own account. The broker or exchange members do the trade on the company’s behalf.  Dealings only in registered securities- Only listed securities recorded in the exchange office can be traded.  Transaction- Only through authorised brokers and members the transaction for securities can be made.  Recognition- It requires to be recognised by the central government.  Measuring device- It develops and indicates the growth and security of a business in the index of a stock exchange.  Operates as per rules– All the security dealings at the stock exchange are controlled by exchange rules and regulations and SEBI guidelines.
  34. 34. Limitations of the Secondary Market?  The prices of securities in a secondary market are subject to high volatility. Price fluctuations may lead to sudden or unpredictable losses for investors.  Buying and selling in a secondary market can be time consuming. Investors have to deal with the tedious paperwork involved before completing final transactions.  Investors must be careful with their brokerage commissions because they are taxed every time the trade is made. Commissions can have a huge impact on investors and may even dent your profit margin if you’re not paying attention.  Multiple external factors influence the investments in a secondary capital market thereby subjecting them to high risk. These may lead investors’ existing valuations to change rapidly within seconds.
  35. 35.  A stock exchange is a place where securities, shares, bonds and other financial instruments are listed and bought and sold by traders or brokers. To be able to trade on a stock exchange, securities must be listed on it. Stock exchanges help companies to raise funds. Therefore the company needs to list themselves in the stock exchange.  The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an "association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in Securities".  The securities include:  (i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;  (ii) Government securities; and  (iii) Rights or interest in securities. Stock exchange
  36. 36.  A stock exchange is a floor or platform which hosts a market where buyers and sellers come together to trade stocks during specific hours of business days. Stock exchange in India  There are 23 stock exchanges in India. Among them,  two are national-level stock exchanges namely 1. Bombay Stock exchange (BSE) 2. National Stock Exchange (NSE). The rest 21 are Regional Stock Exchanges (RSEs).
  37. 37. BSE (BOMBAY STOCK EXCHANGE  Established in 1875, BSE (formerly known as Bombay Stock Exchange), is Asia's first & the Fastest Stock Exchange in world with the speed of 6 micro seconds and one of India's leading exchange groups. Over the past 143 years, BSE has facilitated the growth of the Indian corporate sector by providing it an efficient capital-raising platform. Popularly known as BSE, the bourse was established as ‘The Native Share & Stock Brokers' Association’ in 1875. In 2017 BSE become the 1st listed stock exchange of India. Today BSE provides an efficient and transparent market for trading in equity, currencies, debt instruments, derivatives, mutual funds. BSE SME is India’s largest SME platform which has listed over 250 companies and continues to grow at a steady pace. BSE StAR MF is India’s largest online mutual fund platform which process over 27 lakh transactions per month and adds almost 2 lakh new SIPs ever month. BSE Bond, the transparent and efficient electronic book mechanism process for private placement of debt securities, is the market leader with more than Rs 2.09 lakh crore of fund raising from 530 issuances. (F.Y. 2017-2018). Keeping in line with the vision of Shri Narendra Modi, Hon’be Prime Minister of India, BSE has launched India INX, India's 1st international exchange, located at GIFT CITY IFSC in Ahmedabad. Indian Clearing Corporation Limited, a wholly owned subsidiary of BSE, acts as the central counterparty to all trades executed on the BSE trading platform and provides full novation, guaranteeing the settlement of all bonafide trades executed. BSE Institute Ltd, another fully owned subsidiary of BSE runs one of the most respected capital market educational institutes in the country. BSE has also launched BSE Sammaan, the CSR exchange, is a 1st of its kind initiative which aims to connect corporate with verified NGOs BSE's popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. It is traded internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa)
  38. 38. NSE (NATIONAL STOCK EXCHANGE  The National Stock Exchange (NSE) is the leading stock exchange in India and the fourth largest in the world by equity trading volume in 2015, according to World Federation of Exchanges (WFE). NSE was the first exchange in India to implement electronic or screen- based trading. It began operations in 1994 and is ranked as the largest stock exchange in India in terms of total and average daily turnover for equity shares every year since 1995, [based on SEBI data]. NSE has a fully-integrated business model comprising our exchange listings, trading services, clearing and settlement services, indices, market data feeds, technology solutions and financial education offerings. NSE also oversees compliance by trading and clearing members with the rules and regulations of the exchange. NSE is a pioneer in technology and ensures the reliability and performance of its systems through a culture of innovation and investment in technology. NSE believes that the scale and breadth of its products and services, sustained leadership positions across multiple asset classes in India and globally enable it to be highly reactive to market demands and changes and deliver innovation in both trading and non-trading businesses to provide high-quality data and services to market participants and clients.
  39. 39. Functions of Stock Exchange  Role of an Economic Barometer: Stock exchange serves as an economic barometer that is indicative of the state of the economy. It records all the major and minor changes in the share prices. It is rightly said to be the pulse of the economy, which reflects the state of the economy.  Valuation of Securities: Stock market helps in the valuation of securities based on the factors of supply and demand. The securities offered by companies that are profitable and growth-oriented tend to be valued higher. Valuation of securities helps creditors, investors and government in performing their respective functions.  Transactional Safety: Transactional safety is ensured as the securities that are traded in the stock exchange are listed, and the listing of securities is done after verifying the company’s position. All companies listed have to adhere to the rules and regulations as laid out by the governing body.  Contributor to Economic Growth: Stock exchange offers a platform for trading of securities of the various companies. This process of trading involves continuous disinvestment and reinvestment, which offers opportunities for capital formation and subsequently, growth of the economy.  Making the public aware of equity investment: Stock exchange helps in providing information about investing in equity markets and by rolling out new issues to encourage people to invest in securities.
  40. 40.  Offers scope for speculation: By permitting healthy speculation of the traded securities, the stock exchange ensures demand and supply of securities and liquidity.  Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready platform for the sale and purchase of securities. This gives investors the confidence that the existing investments can be converted into cash, or in other words, stock exchange offers liquidity in terms of investment.  Better Capital Allocation: Profit-making companies will have their shares traded actively, and so such companies are able to raise fresh capital from the equity market. Stock market helps in better allocation of capital for the investors so that maximum profit can be earned.  Encourages investment and savings: Stock market serves as an important source of investment in various securities which offer greater returns. Investing in the stock market makes for a better investment option than gold and silver.
  41. 41. Trading Procedure on a Stock Exchange  Selection of the broker: The first and the foremost step in the trading procedure on a stock exchange is selecting and choosing the right broker who must be a member of the stock exchange.  Placing the order: After selecting a broker for the trading, the next step is to place the order. The investors may specify the number and type of securities that he/she wants to trade.  Executing the order: After the order has been placed to the broker by the investor, the broker will then buy or sell the securities as per the instructions and information given by the investor.  Settlement: After the execution of the order by the broker, the transactions are carried out accordingly. It can be carried out either on a cash basis or carryover basis. The amount of time during which transactions are carried forward is referred to as accounts ranging from one quarter to one month. All transactions made in the course of a single account shall be resolved by payment for sales and by the issuance of share certificates, which is evidence of the individual’s ownership of the securities.