Q1. Define methods, activities and intermediaries of primary market.

ANS - In finance and investment, the primary market refers to the initial issuance of securities (such
as stocks and bonds) by companies or government entities to raise capital. It is the market where
these newly issued securities are sold for the first time to investors. The primary market plays a
crucial role in capital formation, allowing companies to raise funds for their operations and growth.
Here are the key elements and participants in the primary market:

1. Methods of Issuance:

-Initial Public Offering (IPO): This is the most common method where a private company offers its
shares to the public for the first time, allowing investors to become shareholders.

-Rights Issue: Existing shareholders are given the opportunity to purchase additional shares in
proportion to their current holdings. This is a way for a company to raise capital from its existing
investors.

-Private Placement: Securities are offered to a select group of institutional investors or high-net-
worth individuals without a public offering. This method is often used by companies that don't want
to go through the rigorous regulatory process of an IPO.

-Preferential Allotment: A company issues new shares to a specific group of existing shareholders at a
predetermined price. This method is often used to raise capital from a select group of investors.

2. Activities:

-Securities Underwriting: Investment banks or financial institutions play a key role in helping issuers
determine the offering price, the number of shares to be issued, and marketing the securities to
potential investors.

- Due Diligence: Both the issuer and underwriters conduct extensive due diligence to ensure all legal
and financial requirements are met before the offering.

- Offering Documentation: The preparation of offering documents such as prospectuses and offering
memoranda that provide information about the issuer's financials, operations, risks, and terms of the
offering.

- Marketing and Promotion: Promoting the securities to potential investors through roadshows,
presentations, and advertising to generate interest and demand.
- Subscription and Allotment: Investors submit their bids or applications to purchase the securities,
and the issuer and underwriters allocate the shares based on the offering terms.

3. Intermediaries:

- Investment Bank: They often serve as intermediaries between issuers and investors, helping
companies navigate the primary market process. Investment banks may also underwrite the
securities, taking on the risk of unsold shares.

- Stock Exchanges: In the case of IPOs, stock exchanges facilitate the listing of newly issued shares,
enabling them to be traded in the secondary market after the primary offering.

- Regulatory Authorities: Regulatory bodies like the Securities and Exchange Commission (SEC) in the
United States oversee and regulate the primary market to ensure transparency and protect investors.

- Legal and Financial Advisors: Companies may engage legal and financial professionals to assist with
legal compliance, financial reporting, and structuring the offering.

- Investors: Investors, including institutional investors and individual investors, participate in the
primary market by purchasing newly issued securities.

Q2. Find the instrument of capital market.

ANS - In the capital market, various financial instruments are traded, allowing investors to buy and
sell ownership stakes in companies or invest in debt securities. These instruments facilitate the flow
of capital between investors and issuers. Common instruments in the capital market include:

1. Equity Instruments:

 Common Stocks: These represent ownership in a company and typically come with
voting rights at shareholder meetings. Investors in common stocks may receive
dividends and benefit from capital appreciation.

 Preferred Stocks: Preferred stockholders have a higher claim on a company's assets

and earnings than common stockholders. They often receive fixed dividend
payments and have limited voting rights.

2. Debt Instruments:

 Bonds: Bonds are debt securities issued by governments, corporations, or other

entities to raise capital. Bondholders lend money to the issuer in exchange for
periodic interest payments and the return of the bond's face value at maturity.

 Notes: Notes are similar to bonds but typically have shorter maturities, usually
ranging from one to ten years.
  Debentures: Debentures are unsecured bonds, meaning they are not backed by
specific collateral. They rely on the issuer's creditworthiness for repayment.

 Convertible Bonds: These bonds allow bondholders to convert their bond holdings
into a specified number of common shares of the issuing company at a
predetermined conversion price.

 Mortgage-Backed Securities (MBS): MBS represent an ownership interest in a pool of

mortgages. They are often issued by government-sponsored entities or private
institutions.

 Asset-Backed Securities (ABS): ABS are securities backed by a pool of underlying

assets, such as auto loans, credit card receivables, or other financial assets.

3. Hybrid Instruments:

 Preferred Equity or Convertible Preferred: These are hybrid instruments that

combine features of both equity and debt. They offer fixed dividends but can be
converted into common shares.

 Warrants: Warrants are options that give the holder the right, but not the obligation,
to purchase common stock at a predetermined price for a specific period.

4. Derivative Instruments:

 Options: Options provide the holder the right, but not the obligation, to buy (call
option) or sell (put option) an underlying security at a specified price before or on a
certain expiration date.

 Futures: Futures contracts obligate the buyer to purchase and the seller to sell an
underlying asset at a predetermined price on a specified future date.

5. Exchange-Traded Funds (ETFs):

 ETFs are investment funds that hold a diversified portfolio of assets (e.g., stocks,
bonds, commodities) and are traded on stock exchanges like individual stocks.

6. Real Estate Investment Trusts (REITs):

 REITs are companies that own, operate, or finance income-producing real estate
properties. They offer investors the opportunity to invest in real estate assets.

Q3. Features of capital market, types of mutual fund.

ANS - Features of Capital Market:

1. Long-Term Investments: Capital markets primarily deal with long-term financial instruments,
such as stocks and bonds, which have longer maturity periods compared to money market
instruments. Investors in the capital market typically seek to invest their funds for an
extended period to achieve capital appreciation or income.

2. Ownership and Debt Instruments: Capital markets offer both ownership (equity) and debt
(fixed-income) instruments. Investors can choose between stocks, which represent
ownership in a company, and bonds, which represent loans to companies or governments.
 3. Risk and Return: Capital market investments come with varying levels of risk and potential
return. Equities have higher risk but offer the potential for substantial returns, while bonds
are generally considered lower risk with more predictable returns.

4. Secondary Market: Capital markets have active secondary markets where investors can buy
and sell previously issued securities. These secondary markets provide liquidity and allow
investors to exit their investments before maturity.

5. Intermediaries: Financial intermediaries such as brokerage firms, investment banks, and

stock exchanges play a significant role in facilitating transactions and providing services to
investors and issuers in the capital market.

6. Regulation: Capital markets are subject to extensive regulation by government agencies and
regulatory bodies. This regulation aims to protect investors, ensure fair and transparent
trading practices, and maintain market integrity.

7. Diversification: Capital markets offer opportunities for diversification by investing in a range

of assets and sectors. Diversification helps spread risk and reduce the impact of poor
performance in a single investment.

Types of Mutual Funds:

Mutual funds are investment vehicles that pool money from multiple investors to invest in a
diversified portfolio of securities, such as stocks, bonds, or a combination of assets. There are various
types of mutual funds, each with its investment objective, risk profile, and characteristics. Some
common types of mutual funds include:

1. Equity Funds:

 Large-Cap Equity Funds: Invest primarily in stocks of large, well-established

companies.

 Mid-Cap and Small-Cap Equity Funds: Focus on stocks of mid-sized and smaller
companies, respectively.

 Sector Funds: Concentrate investments in specific sectors like technology,

healthcare, or energy.

2. Fixed-Income Funds:

 Government Bond Funds: Invest in government-issued bonds, which are generally

considered low risk.

 Corporate Bond Funds: Hold bonds issued by corporations, offering higher potential
yields but also higher risk.

 Municipal Bond Funds: Invest in municipal bonds issued by state or local

governments, often offering tax advantages.

3. Balanced or Hybrid Funds:

 Asset Allocation Funds: Invest in a mix of stocks, bonds, and sometimes other assets
to achieve a balanced portfolio.
  Target-Date Funds: Adjust their asset allocation over time based on a target
retirement date, becoming more conservative as the target date approaches.

4. Money Market Funds:

 Money Market Funds: Invest in short-term, highly liquid securities like Treasury bills
and commercial paper, aiming for stability and preservation of capital.

5. Alternative Funds:

 Hedge Funds: Pursue a wide range of investment strategies, including long-short,

arbitrage, and derivatives trading.

 Real Estate Investment Trust (REIT) Funds: Invest in real estate assets, such as
properties and mortgages.

6. Index Funds and Exchange-Traded Funds (ETFs):

 Index Funds: Mirror the performance of a specific market index (e.g., S&P 500).

 ETFs: Trade on stock exchanges like individual stocks and aim to replicate the
performance of an underlying index or asset class.

7. Specialty Funds:

 Commodity Funds: Invest in commodities like gold, oil, or agricultural products.

 Ethical or Socially Responsible Funds: Follow specific ethical or social criteria when
selecting investments.

Q4. Unit 1 (Need for investment, Investment alternatives; Overview of Capital Markets - Capital
market participants, governing rules. Intermediaries, features of developed capital market in India.
reforms in the capital market in India).

ANS - Need for Investment:

Investment is crucial for several reasons:

1. Wealth Accumulation: Investment allows individuals and organizations to grow their wealth
over time by earning returns on their capital. This is essential for achieving financial goals like
retirement planning, buying a home, or funding education.

2. Hedging against Inflation: Investments can potentially outpace inflation, ensuring that the
real value of money grows rather than erodes over time.

3. Income Generation: Investments can provide a source of passive income through dividends,
interest payments, or rental income.

4. Capital Formation: Investment in businesses and infrastructure is essential for economic

growth and development. It stimulates job creation and drives innovation.

5. Risk Diversification: Diversifying investments across different asset classes can help spread
risk and reduce the impact of poor performance in a single investment.

Investment Alternatives:
There are various investment alternatives, including:

1. Stocks: Buying shares of companies to become an owner and potentially benefit from capital
appreciation and dividends.

2. Bonds: Investing in fixed-income securities issued by governments or corporations, earning

periodic interest payments.

3. Real Estate: Purchasing physical properties or real estate investment trusts (REITs) to
generate rental income and capital appreciation.

4. Mutual Funds: Pooling funds with other investors to invest in diversified portfolios of stocks,
bonds, or other assets.

5. ETFs (Exchange-Traded Funds): Similar to mutual funds but traded on stock exchanges like
individual stocks.

6. Commodities: Investing in physical commodities like gold, oil, or agricultural products.

7. Cryptocurrencies: Buying digital assets like Bitcoin and Ethereum.

8. Savings Accounts and Certificates of Deposit (CDs): Low-risk, interest-bearing accounts

offered by banks.

Overview of Capital Markets:

Capital markets are financial markets where long-term securities, such as stocks, bonds, and
derivatives, are bought and sold. Key components include:

 Capital Market Participants: These include investors, issuers (companies or governments),

intermediaries (brokerage firms, investment banks), and regulatory authorities.

 Governing Rules: Capital markets are regulated by government agencies to ensure

transparency, fairness, and investor protection. Rules and regulations vary by country and
may include disclosure requirements, trading rules, and investor protection measures.

 Intermediaries: Intermediaries like investment banks, brokerage firms, and stock exchanges
facilitate transactions, provide market access, and offer financial services to investors and
issuers.

Features of Developed Capital Market in India:

A developed capital market in India would exhibit the following features:

1. Efficiency: Efficient capital allocation, quick trade execution, and minimal trading costs.

2. Transparency: High levels of disclosure, reporting, and investor protection.

3. Diverse Investment Opportunities: A wide range of investment options across asset classes.

4. Liquidity: High liquidity, with ample buyers and sellers in the market.

5. Regulatory Framework: Strong regulatory oversight and enforcement.

6. Access to International Investors: Integration with global capital markets.

7. Innovation: Introduction of new financial products and technologies.

Reforms in the Capital Market in India:

India has implemented several reforms to develop its capital market:

1. Dematerialization: The shift from physical share certificates to electronic form (demat) has
improved efficiency and reduced fraud.

2. SEBI (Securities and Exchange Board of India): SEBI's establishment in 1988 brought
significant regulatory improvements, ensuring investor protection and market integrity.

3. Introduction of Derivatives: The introduction of derivatives markets, such as stock futures

and options, has provided risk management tools and enhanced market depth.

4. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE): The establishment of
these exchanges improved trading infrastructure and access.

5. Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI): Liberalization of
investment rules attracted foreign capital.

6. Mutual Fund Industry: Regulatory changes and innovations have led to the growth of the
mutual fund industry.

7. Listing Requirements: Stricter listing requirements have improved corporate governance and
disclosure standards.

8. Electronic Trading: The adoption of electronic trading platforms has made trading more
efficient and accessible.