Capital Market

Unit 2
Content
What is capital market?
Functions of Capital market
Features of Capital Market
Key Elements of capital Market
Types of capital Market
Capital Market Instruments
Indian Debt market
What is Capital Market?
The capital market refers to a financial market where
individuals, institutions, and governments buy and sell
financial securities. These securities include stocks, bonds,
mutual funds, derivatives, and other instruments. The
primary purpose of the capital market is to facilitate the
flow of capital between those who have it (investors) and
those who need it (companies and governments).
Capital markets play a crucial role in allocating resources
efficiently, enabling companies to raise funds for expansion,
innovation, and other projects. Investors participate in
capital markets to earn returns on their investments through
dividends, interest payments, or capital gains
Features
Capital market is a channel where savings of small
investors are made available to industries or corporate.
This market moves savings towards investments or
production.
It acts as a mediator between savers and investors, so
that productive assets can be created.
It is a market for raising long-term fund for
institutions.
Long-term means more than one year.
The fund may be raise in form of Equity or Debt.
Functions
 Facilitating Capital Formation: One of the primary functions of the
capital market is to facilitate the flow of capital from investors to
companies and governments. This capital enables these entities to
finance various projects, such as expansion, research and development,
infrastructure development, and other initiatives that contribute to
economic growth.
 Providing Liquidity: The capital market provides a platform for
investors to buy and sell securities, thereby offering liquidity to
investors. This liquidity allows investors to easily convert their
investments into cash when needed, which enhances market efficiency
and reduces transaction costs.
 Price Discovery: The interaction of buyers and sellers in the capital
market helps determine the prices of securities. Through the process of
buying and selling, market participants incorporate available information
and assess the value of securities, leading to efficient price discovery.
Functions…
 Risk Diversification: Capital markets offer investors a wide range of
investment options, including stocks, bonds, derivatives, and other
financial instruments. By diversifying their investments across different
asset classes and securities, investors can reduce their exposure to
specific risks and potentially improve their overall risk-adjusted returns.
 Allocation of Capital: Capital markets play a crucial role in allocating
capital to its most productive uses. Investors allocate their capital to
companies and projects that offer the highest potential returns,
encouraging efficient resource allocation and capital allocation
decisions.
 Facilitating Corporate Governance: Capital markets impose market
discipline on companies by requiring transparency and accountability.
Listed companies must disclose financial information to investors,
adhere to regulatory requirements, and uphold corporate governance
standards to maintain investor confidence and access to capital.
Functions…..
Providing Investment Opportunities: Capital
markets offer individuals and institutional investors a
range of investment opportunities to grow their wealth
over time. Whether through stocks, bonds, mutual
funds, or other investment vehicles, investors can
participate in the capital market to achieve their
financial goals, such as wealth accumulation,
retirement planning, or income generation.
Key Elements of Capital Market
Issuers – Companies and Government
Regulators - SEBI
Intermediaries- Stock Broker, Investment Bank, Asset
Management Companies
Investors – Individuals, Institutions, Retail Investors,
Mutual Funds, Pension Fund etc.
Exchanges- BSE, NSE
Securities – Stocks, Bonds, Debentures, Mutual Funds
Price Discovery Mechanism
Types of Capital Market
The capital market is typically divided into two main
segments:
Primary Market: This is where new securities are
issued and sold for the first time. It involves the initial
public offerings (IPOs) of stocks and bonds by
companies, as well as other forms of primary issuance.
Secondary Market: This is where previously issued
securities are bought and sold among investors. The
secondary market enables investors to trade securities
after their initial issuance, providing liquidity and price
discovery.
Equity Market and Debt Market:
Equity Market: Also known as the stock market, it
involves the buying and selling of shares or ownership
stakes in publicly traded companies.
Debt Market: This market deals with the issuance and
trading of debt securities, such as bonds and
debentures, which represent loans made by investors to
governments or corporations.
Public Market and Private
Market:
Public Market: In this market, securities are bought
and sold on organized exchanges or over-the-counter
(OTC) platforms, and information about the securities
is publicly available.
Private Market: This refers to transactions involving
securities that are not traded on public exchanges.
They often involve private placements, venture capital
investments, and private equity deals.
Primary Market Segments:
Retail Market: Involves individual investors
participating in primary market offerings.
Institutional Market: Comprises institutional investors,
such as mutual funds, pension funds, and insurance
companies, participating in primary market offerings.
Geographical Segmentation:
Domestic Capital Market: Involves securities traded
within a specific country's borders.
International Capital Market: Encompasses securities
traded across national borders, including global stock
exchanges and international bond markets.
Commodity Market and Real Estate
Market:
Commodity Market: Involves the trading of
commodities such as gold, oil, agricultural products,
and metals.
Real Estate Market: Involves the buying, selling, and
financing of real estate properties and related
securities, such as real estate investment trusts
(REITs).
Capital Market Instruments
 Stocks (Equities): Stocks represent ownership shares in a company.
Investors who purchase stocks become partial owners of the company
and may receive dividends as a share of profits. Stocks also offer the
potential for capital appreciation if the company's value increases.
 Bonds: Bonds are debt securities issued by governments,
municipalities, or corporations to raise capital. When an investor buys
a bond, they are essentially lending money to the issuer in exchange
for periodic interest payments and the return of the principal amount
at maturity.
 Mutual Funds: Mutual funds pool money from multiple investors to
invest in a diversified portfolio of stocks, bonds, or other securities.
Investors in mutual funds own shares of the fund rather than owning
the underlying securities directly. Mutual funds are managed by
professional portfolio managers.
Capital Market Instruments…
 Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds
but trade on stock exchanges like individual stocks. They typically track
a specific index, sector, commodity, or other asset classes. ETFs offer
diversification and liquidity, as they can be bought and sold throughout
the trading day.
 Derivatives: Derivatives are financial contracts whose value is derived
from the performance of an underlying asset, index, or benchmark.
Common types of derivatives include options, futures, forwards, and
swaps. Derivatives are used for hedging, speculation, and risk
management purposes.
 Preferred Stocks: Preferred stocks combine characteristics of both
stocks and bonds. They typically pay fixed dividends like bonds and
have priority over common stocks in terms of dividend payments and
asset distribution in the event of liquidation. However, preferred
stockholders generally do not have voting rights.
Capital Market Instruments….
 Treasury Securities: These are debt securities issued by the
government, such as Treasury bills, notes, and bonds. They are
considered among the safest investments because they are backed
by the full faith and credit of the government.
 Commercial Papers: Commercial papers are short-term debt
instruments issued by corporations to finance short-term liabilities
and operational expenses. They typically have maturities ranging
from a few days to one year and are usually issued at a discount to
face value.
 Real Estate Investment Trusts (REITs): REITs are companies that
own, operate, or finance income-generating real estate properties.
Investors can buy shares of REITs, which provide exposure to real
estate assets and typically offer regular income distributions.
Indian Debt Market
The Indian debt market refers to the market where
fixed-income securities are issued and traded. It plays
a crucial role in providing a platform for the
government, corporations, financial institutions, and
other entities to raise capital by issuing debt
instruments. The Indian debt market can be broadly
categorized into two segments: the government
securities market and the corporate bond market.
Government Securities Market
 Government securities (G-Secs) are debt instruments issued by the
Government of India to finance its fiscal deficit and meet other
financial obligations.
 These securities include treasury bills (T-bills) with short-term
maturities and government bonds with longer maturities, ranging
from a few months to several years.
 The Reserve Bank of India (RBI) acts as the issuer, auctioneer, and
regulator of government securities.
 The government securities market serves as a benchmark for pricing
other debt instruments and plays a crucial role in monetary policy
transmission.
Corporate Bond Market:
 The corporate bond market consists of debt securities issued
by corporations to raise funds for various purposes, such as
capital investment, working capital, and refinancing existing
debt.
 Corporate bonds come in different varieties, including secured
bonds, unsecured bonds, convertible bonds, and debentures.
 The Securities and Exchange Board of India (SEBI) regulates
the issuance and trading of corporate bonds in India.
 The corporate bond market provides an alternative source of
financing for companies and allows investors to diversify their
portfolios beyond government securities.
Other key features of the Indian debt
market include:
 Bond Market Infrastructure: The National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE) are the primary stock exchanges where corporate
bonds are traded. In addition, the Over-the-Counter Exchange of India (OTCEI)
and the National Commodity and Derivatives Exchange Limited (NCDEX) also
facilitate bond trading.
 Credit Rating Agencies: Credit rating agencies such as CRISIL, ICRA, and
CARE provide credit ratings for corporate bonds, helping investors assess credit
risk and make informed investment decisions.
 Regulatory Framework: SEBI, RBI, and other regulatory bodies play a crucial
role in regulating and overseeing the Indian debt market to ensure transparency,
fairness, and investor protection.
 Investor Base: The investor base in the Indian debt market includes banks,
financial institutions, mutual funds, insurance companies, pension funds, corporate
treasuries, and retail investors.
The Indian debt market continues to evolve, driven by regulatory reforms,
infrastructure development, and growing investor participation, contributing to the
depth and liquidity of the market.