What is Capital Market?

 Capital Market refers to that part of the broader financial market which
provides a market for borrowing and lending of medium and long-term
funds, above 1 year.
o Thus, it caters to the borrowing needs for medium to long term
projects and investments.
 Because of the long maturity period, the Capital Market facilitates the
mobilization and allocation of long-term funds.

Components and Structure of Capital Market

The capital market is a complex system, formed by various components. Various

components and structure of capital market can be classified into the following 3
categories.

Capital Market Participants

Capital Market participants include the individuals and institutions that interact
within the market. These participants can be, broadly, categorized into 2 groups:

 Investors or Suppliers of Capital: These are entities with surplus funds and
are looking to invest. They include individuals, pension funds, insurance
companies, and commercial banks.
 Borrowers or Issuers of Securities: These are entities that raise funds by
issuing various types of securities. They include businesses looking to
expand, governments financing projects, and individuals seeking loans.

Capital Market Instruments

Capital Market Instruments or the Instruments of Capital Market refer to various
types of financial tools used within the market. They include financial securities
and derivatives that serve as mediums and facilitate the flow of money among the
participants of the capital market.

Various capital market instruments can be, broadly, classified into the following
types:

 Share or Stock
 Debt Instruments
 Derivatives
 Mutual Funds
  Exchange Traded Funds (ETFs)
 Instruments of Foreign Investments

Each type of capital market instrument has been discussed in detail in our
article Instruments of Capital Market.

Capital Market Infrastructure

Capital Market Infrastructure refers to the institutions that facilitate the smooth
operation of the market. These institutions play a crucial role in connecting various
participants and ensuring their regulated interactions for trading through
instruments available in the market.

Major types of institutions forming part of the capital market infrastructure are as
follows:

 Stock Exchanges: Stock exchanges are essentially marketplaces for buying

and selling financial instruments. They act as a central platform where
investors and companies connect.
o Various concepts regarding Stock Exchanges have been dealt with in
detail below.
 Regulatory Bodies: These organizations ensure fair and transparent
practices within the market. Major regulators involved in regulation of
Capital Market in India are:
o Securities and Exchange Board of India (SEBI)
o Reserve Bank of India (RBI)
o Union Ministry of Corporate Affairs, and
o Department of Economic Affairs, Union Ministry of Finance.
 Financial Intermediaries: These institutions connect investors with those
seeking capital.
o Brokers, investment banks, and underwriters are some examples.

Types of Capital Market

Based on the type of securities traded, the Capital Market is of 2 types:

Primary Market or New Issue Market

 The Primary Market is the type of Capital Market where new

securities are issued for the first time.
o Thus, it is also called the New Issue Market.
  The primary market provides the channel for the sale of new securities. The
issuer of securities sells the securities in the primary market to raise funds
for investment and/or to discharge.
o In other words, the market wherein resources are mobilized by
companies through the issue of new securities is called the primary
market.

Secondary Market or Old Issue Market

 The Secondary Market refers to a market where those types of securities

are traded, which have already been issued and offered to the public in the
Primary Market and/or listed on the Stock Exchange.
o Thus, it is also called the Old Issue Market.
 The secondary market enables securities holders to adjust their holdings in
response to changes in their assessment of risk and return or to buy/sell their
securities as per their liquidity needs.

Difference between Primary Market and Secondary Market

Primary Market Secondary Market
New market securities are sold. Only existing securities are traded.
Investors have the option of only buying Investors can both buy and sell
the securities. securities.
The price of securities is mostly decided by The price of securities is
the management of the issuing company. determined by the demand and
supply of the market.
Primary Markets have no fixed Secondary Markets are located at
geographical location. specified places, known as Stock
Exchange.
Major intermediaries – Merchant Banks, Major intermediaries – Brokers,
Underwriters, Debenture Trustees, Jobbers, etc.
Portfolio Managers, etc.

Primary Market or New Issue Market: Concepts

Types of Issues in Primary Market

The issue of new securities in the Primary Market occurs through various methods
as discussed below.
Public Issue or Public Offering

 Public Issue or Public Offering refers to the process of a company offering

its securities (usually stocks or bonds) for sale to the general public for the
first time or subsequently.
 It is the usual way through which companies raise capital from a broad range
of investors.
 There are 2 main types of public issues:

Initial Public Offering (IPO)

 Initial Public Offering (IPO) refers to the process when a private or

unlisted company sells its shares to the public for the very first time.
 This process transforms the company from being privately owned to a public
company.
o This is why an IPO is also referred to as “going public”.
 It is generally used by new and medium-sized firms that are looking for
funds to grow and expand their business.
 After IPO, the company’s shares are traded in an open market.
o Those shares can be further sold by investors through secondary
market trading.

Follow on Public Offering (FPO)

 Follow on Public Offering (FPO) refers to the process when a company,

that has already issued shares and is listed on a stock exchange, issues
shares again to raise additional fund.
 Public companies have to sell at least 25% of their shares to the public to be
traded on a stock exchange. Usually, it is this requirement that makes
companies go for FPOs.

Offer For Sale

 Under this method, securities are not issued directly to the public but are
offered for sale through intermediaries like issuing houses or stock brokers.
 In this case, a company sells securities enbloc at an agreed price to brokers
who, in turn, resell them to the investing public.
Bonus Issue or Scrip Issue or Capitalization Issue

 It refers to offer of share to the existing shareholders against their

distributable profit.
 Thus, under this, shareholders’ share in profit is converted as shares.

Rights Issue

 Rights Issue is an invitation to existing shareholders to purchase

additional new shares in the company.
 This type of issue gives existing shareholders rights to purchase new
shares at a discount to the market price on a stated future date.
o That’s why it is called Rights Issue.

Private Placement
When an issuer makes an issue of securities to a limited group of pre-selected
investors, and which is neither a rights issue nor a public issue, it is called a private
placement.

Private placement can be of 2 types:

Preferential Allotment
When a listed issuer issues shares or convertible securities to a select group of
persons, it is called a Preferential Allotment.

Qualified Institutional Placement (QIP)

When a listed issuer issues shares or convertible securities to a select group of
Qualified Institutional Buyers (QIBs), it is called a Qualified Institutional
Placement (QIP).

Key Terminologies Related to Primary Market

Declared Price Issue
Its a method of pricing new issues wherein the issuer offers securities at a pre-fixed
price.

Book Building Issue

Its is another method of pricing new issues wherein the price is not announced
beforehand. Rather, the issuer, first, offers the shares and gets application from
public and then based on the demand fixes the price.
Authorized Capital
It is the maximum amount authorized by Memorandum of Association of a
company that can be raised by the company. The issuer can issue securities upto
worth this amount only.

Issued Capital
It is the actual amount issued by the issuer. It may be equal to or lesser than the
Authorized Capital.

Subscribed Capital
After the company issues shares, the public starts subscribing to those shares. The
subscription can be oversubscribed (demand of shares more than the issued number
of shares) or undersubscribed (demand of shares less than the issued number of
shares). The actual amount subscribed is called Subscribed Capital.

Merchant Bankers
A “merchant banker” means any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying or
subscribing to securities or acting as manager, consultant, adviser or rendering
corporate advisory service in relation to such issue management.

Underwriting
Underwriting means an agreement with or without conditions to subscribe to the
securities of a body corporate when the existing shareholders of such body
corporate or the public do not subscribe to the securities offered to them.

Underwriter
The financial intermediary which agrees to purchase the undersubscribed portion
of issued capital is called Underwriter.

Called Up Capital
The company usually collects the subscribed capital in installments. The portion of
money demanded from subscriber is known as Called Up Capital.

Paid Up Capital
The amount actually paid by subscribers, when the money is demanded by the
issuer, is known as Paid Up Capital.
Reserve Capital
Usually, the issuer does not demand the whole amount from the subscriber. A
small portion of money is left un-demanded, which is called Reserve Capital.

Secondary Market or Old Issue Market: Concepts

Components of Secondary Market

Based on the type of trading, the secondary market has 2 components:

Over-The-Counter (OTC) Market

 Over-The-Counter Markets or OTC Markets are essentially informal

markets for trading securities.
 It is a decentralized marketplace where securities are traded directly between
two parties, bypassing a central exchange.
 OTC markets are generally subject to less stringent regulations than
exchanges.

Stock Exchange Market

It refers to markets for trading of securities through a centralized exchange, usually
called Stock Exchange.

Key Terminologies Related to Secondary Market

Listed Securities
Listed Securities refer to those securities that are accepted to be traded in stock
exchanges.

Cash Trading
Its a type of trading in the Secondary Market wherein the sale and purchase of
securities takes place at the prevailing price on the day of trading.

Forward Trading
Its another type of trading in the Secondary Market wherein both buyer and seller
agree to buy and sell respectively at a future date at a pre-agreed price, irrespective
of the price that prevails on the day of trade.

Third Market

 Third Market refers to the trading of exchange-listed securities in the over-

the-counter (OTC) market.
  It allows institutional investors to trade blocks of securities directly, rather
than through an exchange, providing liquidity and anonymity to buyers.

Fourth Market
Fourth Market refers to institution-to-institution trading directly, without using the
service of broker-dealers, thus avoiding both commissions, and the bid–ask spread.

Stock Exchange

 A Stock Exchange is a regulated marketplace where investors can buy and

sell shares of publicly traded companies.
o It acts as a central hub for facilitating stock trading in a secure and
efficient manner.
 In India, a Stock Exchange can operate only if it is recognized by the
Government under the Securities Contracts (Regulation) Act, 1956.

Stock Exchanges of India

Bombay Stock Exchange (BSE)

 The Bombay Stock Exchange (BSE) is India’s largest and earliest securities
market.
 It is also Asia’s first stock exchange.
 BSE On-Line Trading (BOLT) is a screen-based automated trading platform
of BSE.
 The BSE also offers depository services through one of its arms called the
Central Depository Services Limited (CDSL)

National Stock Exchange of India Ltd. (NSE)

 The National Stock Exchange of India Ltd. (NSE) is India’s largest financial
market.
 It ranks fourth in the world by equity trading volume.
 NSE is the first exchange in India to provide modern, fully automated
electronic trading.
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 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 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.

3. Utilizes Intermediaries:

Capital market makes use of different intermediaries such as brokers, underwriters,

depositories etc. These intermediaries act as working organs 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. 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.

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.