CAPITAL

MARKET

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Introduction
In every economic system there are savers and
users.
It may be individuals or institutions.
Some are surplus generating while some are
deficit generating.

The surplus generating are called savers while

The deficit generating are called spenders or
users.
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In India because of the social system prevalent and
in the absence of social security provided by the
state, at sectoral level households are surplus
generating while the corporate and Government are
deficit generating.

This is true at aggregate level.

What do the surplus generating units do

with their surpluses or savings?

They have two alternatives before them.

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They can either invest or hold their savings in liquid
form.

The surplus generating units can invest in different

forms.

They could invest in physical assets like land and

building, plant and machinery or in precious metals
like gold and silver or in financial assets like
shares,debentures, treasury bills, commercial papers
etc.

The financial assets are also called financial claims or

financial securities or paper assets. 4
These financial securities are issued by deficit
generating units to surplus generating units in
exchange for their savings.

It is for this reason surplus generating units are called

investors while deficit generating units are called
issuers.

These investors and issuers of financial

securities constitute two important elements of
the securities markets.

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The Third critical element of the market
is the intermediaries who acts as
conduits between the investor and the
issuers.

Regulatory bodies, which regulate the

functioning of the securities markets,
constitute the last but very significant
element of the securities market.

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Thus there are four important elements of the securities
markets:

•Investors
•Issuers
•Intermediaries
•Regulators

Depending on the nature and duration of securities,

the market are called Capital market or Money market.

The Capital Market is the market for long- term funds

i.e.for more than a year.
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The capital markets are classified as:

Primary Market and Secondary Market.

Further, depending on the maturity, the securities

are classified as:

Short term and Long –term.

Depending on issuers these are classified as:

Government Securities or Corporate securities.

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In order to pick up the right kind of securities,
An investor or a portfolio manager should be
fully conversant with different segments of the
Securities Markets.

Different types of securities which are

traded

and

Different trading arrangement which exist

in the market.

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Primary and Secondary Market
Primary market (Direct Market) is the
segment in which new issues are made.

Whereas Secondary market is the segment in

which already issued shares are traded.

It is for this reason primary market is also called

New Issue Market
and
The Secondary Market is called Stock Market
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Primary Market
In the primary market, new issue can be made in
three ways:
•Public issue,
•Right Issue, and
•Private placement

Public Issue involves sale of securities to the

public.
Right Issue involves sale of securities to the
existing Share holders/ debenture holders.
Private Placement involves selling securities
privately to a select group of investors. 11
In the primary market, equity shares, fully convertible
debentures (FCD), Partially convertible debentures
(PCD), and Non-convertible debentures (NCD) are the
securities commonly issued by Non-Government
limited companies and Government Public Sector
Limited Companies.

In the primary market, the issues are made either ‘at

par’ or ‘at premium’.

The pricing of new issues are governed by SEBI

(Securities and Exchange Board of India) guidelines.

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Companies entering the capital markets are required
to issue a Prospectus duly vetted by SEBI.

They have to appoint merchant bankers,brokers,

managers to issue, under writers, bankers to issue,
solicitors etc.

Market the issue by advertisements in various

mediums.

There are SEBI guidelines on advertisements which

should be strictly adhered to.

The advertisement code prescribed by SEBI should

be strictly followed. 13
There are clear guidelines by SEBI for:

• Pricing of issue with proper disclosure and

justification
for the issue price .
• Minimum subscription.
• Role and responsibilities of Lead Managers.
• Allotments.
• Proper disclosures and omissions and risk factors.
• Listing arrangement in the stock exchanges.
• Reservation of shares and firm allotments.
• Preferential allotment to promoters.

Issuer has to comply with the guidelines of SEBI, 14

Company Act 1956, and RBI guidelines etc.
Secondary Market
It is the segment where the securities already
issued are traded.

Imagine the scene when there is no secondary

market.

How you will sell your shares and bring liquidity

into your portfolio.

It is the market where the investors exchange

their holdings with other investors, for
liquidity. 15
The secondary market is thus primarily
aimed to liquefy the investment made in the
primary market and therefore performs a
complementary function.

Investors need profitability and liquidity.

By buying and selling securities through the stock

market an investor can reshuffle his portfolio.

The primary market can not function without the

secondary market and vice versa.
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An active and healthy secondary market in
fact promotes the growth of primary market
and aids capital formation.

The primary market investors are assured of

a continuous market where their investment
can be liquidated.

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Stock Market
The stock exchanges provide an organized
market place for the investors to buy and sell
securities freely.

At present there are two prominent stock

exchanges in India namely; National Stock
Exchange (NSE) and Bombay Stock Exchange
(BSE).

Other Stock exchanges like Calcutta, Delhi has

off late lost its sheen.
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The market for these securities is almost perfectly
competitive one because a large number of sellers
and buyers participate.

The information system is well organized and

there is free flow of information between the
companies listed in the stock exchanges and the
stock exchanges.

Such information is available to the investors

instantly.

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With the development of
Information technology, the
Trading in the stock exchanges
are online.

Now anybody can trade from the

comforts of his house, thereby
ensuring transparency in the
trade.

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This was lacking in the earlier system
of floor trading in the ring which gave
lot of room for manipulations in the
prices at which the actual trade has
been executed.

The SEBI being an independent

regulator, acts as friend,
philosopher, guide and also a police
man on continuous basis.

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SEBI look for imperfections, manipulations
and other unhealthy trends in the market and
take corrective action.

SEBI is proactive and look for possible

loopholes based on experience in India and
abroad.

SEBI takes all the steps for healthy

development of the capital market and also for
investors protection and confidence building.

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SEBI take care of registration of brokers, sub
brokers, share transfer agents, merchant bankers.

Promoting investors education, looking and

plugging loopholes, prohibiting unfair trade
practices.

Preventing and punishing companies resorting to

insider trading.

Regulating substantial acquisition of shares and

take over of companies etc..
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 TRADING SYSTEM

The trading in stock exchanges is done through

brokers registered with SEBI.

Brokers acts as agents buying and selling

securities for others for which they receive
brokerage at the rate which is competitive because
of entering of large number of brokers.

If you want to buy 100 share say of RIL you will

do the following:

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• Open a trading account with a broker registered
with SEBI who will ask you to execute a
contract.

• Place an order with him to buy 100 shares of

RIL for the price which you want to pay
depending on at what rate the share is being
traded.

This can be done by seeing his screen which will

give you the rate of last trade.

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 He will ask you to deposit some margin
with him.

 He will enter your order for purchase in

the computer.
 If at the price quoted there are any sellers the
bid will automatically match and the computer
will show that the trade is executed.

 The broker will ask you to pay the entire

amount of the bill which includes the purchase
price, security transaction tax (STT) and service
tax.
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 He will also issue a contract note giving the
time and date of transaction along with the total
amount payable.

 Your demat account will get credited by 100

shares of RIL and the demat account of the
seller will be debited.

Please note that the seller’s broker is different

and he will take the instruction from the seller
to debit his demat account.

He will pass on the payment to the seller of

securities.
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Stock Market Information system
and common terms
 Stock quotations published in the daily
newspapers are the main source of
information on stock exchange trades
and turnover.

 The stock exchange quotation

published in the Economic Times read
as follows:
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Company’s name Previous closing

Today’s opening High of the day

Low of the day Closing of the day

Volume/Trades P/E Ratio

52 week’s high high/low

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Earning per share
EPS
PAT
EPS = ----------------------------------
Number of share outstanding

It is the figure arrived at by dividing the

profit after tax by the number of shares
outstanding
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Price Earning Ratio
P/E Ratio
Market Price
P/E Ratio= --------------------
EPS
It is ratio of market price and earning
per share (EPS).

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Return on Net Worth
RNW
PAT
RNW = --------------------------------------------
Equity+Share premium+ Free reserves

 RNW is the net profit as a percentage of net

worth.
 It measures the return earned on the
shareholder’s funds i.e.
 Share holder’s funds are: Equity plus share
premium plus free reserves.
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 Ex- Dividend (XD),
Ex- Bonus(XB), Ex-Right
(XR)
 EX–dividend means that the buyer of
that share will not get dividend for that
particular year which has been
announced recently.
 Cum-dividend price is higher than the
Ex-dividend price.
 Similarly the buyer in this case will not
get bonus or right as the case may be.
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SENSEX
 It is the benchmark index comprising of
30 prominent shares traded in BSE.
 The shares comprising in the SENSEX
have different weight age in the index
depending on their volume of trading.
 The stock exchange decides which
shares are to be included and which are
to be excluded from the SENSEX.
 Some of the prominent shares are RIL.
Tata Steel, Infosys, L&T ONGC etc.
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Nifty

 It is bench mark index of NSE.

 It comprises 50 prominent shares
with different weight age.
 The prominent among them are
RIL, Satyam, Tata Motors, Tata
Steel etc.

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Insider Trading
 Insider trading means sale or purchase of
securities by persons who possesses price
sensitive information about the company
before it is made public on account of
fiduciary capacity involving confidence or
trust.

 The insider transaction also includes those

who receive confidential price sensitive
information from insiders who have access
to it.
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 Such an information can help a person to
manipulate the market.

 SEBI has prohibited the insider trading by

Insider Trading Regulations 1992.

 Violations of this may lead to heavy

penalty and in some countries there is
imprisonment for insider trading.

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Arbitrageur
 Arbitrageur is one who specializes in buying
and selling simultaneously in different market the
same share to make gains due to different prices
at different markets.

 The difference in prices in different stock

exchanges is due to delay in receiving the
information and due to absence of perfect
competition.

 The difference will tend to be eliminated due

to demand and supply.
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Demat Account
 It is an account where the securities are
held by the investor in electronic form.

 It is a method of paper less trading.

 It holds custody of shares,handles

transfer like a bank holds money and
transfers
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 The exact record is kept at a custodian which is
known as depository.

 We have two depositories :

NSDL – National stock depository Ltd. and
CDSL- Central Depository Services Ltd.

 They have appointed a number of Depository

Participants (DPs) which acts as their agents
and the investors have to open their account
with any of these.

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IPO
Initial Public Offering

 IPO means offer by any company which

is going to public for the first time.

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Underwriting
 There are instance that the issue
does not evoke good response and
issuer company does not get the
stipulated 90% subscription.

 In that case the company is required

to return the money so collected to
the investors in terms of the SEBI
guidelines.
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 In such a case the great loss to the
company can be very well imagined.

 To tide over such an eventuality the

issuer who feels suspect about the
success of the issue appoints such
person who guarantees (undertakes)
to take up the shares committed by
them.

 Such persons/ institutions are called

underwriters and they get fee.
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Green Shoe Option (GSO)
 In the normal course the amount to
be raised by a company is fixed and
clearly stated.

 Sometimes to meet the heavy

investors demand, the issuer of a
security grants its underwriter an
overall call on 10-15% of the stated
size.
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 The purpose of green shoe option is
to act as post-listing price stabilizing
mechanism through a stabilizing
agent(SA).

 This right is available to a company

making an IPO through book
building mechanism.

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 But Why the strange name
“Green Shoe Option”?

 This is named after the Green

Shoe Company, which first
granted such an option to an
underwriter.

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Red Herring Prospectus

 It is name given to preliminary

prospectus providing information
required by SEBI.

 It excludes the offer price and the

coupon of the new issue.

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 It does not have details of either
price or number of shares being
offered or the amount of issue.

This means that in case the price

is not disclosed, the number of
shares and the upper and lower
price bands are disclosed.

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 On the other hand, an issuer can
state the issue size and the number
of shares are determined later.

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 An Red Herring Prospectus can be
filed with the RoC without the price
band and, in such a case, the issuer
will notify the floor price or a price
band by way of an advertisement
one day prior to the opening of the
issue.

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 In the case of book-built issues, it is a
process of price discovery and the price
cannot be determined until the bidding
process is completed. Hence, such
details are not shown in the Red Herring
prospectus filed with the RoC in terms
of the provisions of the Companies Act.

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 Only on completion of the bidding
process, the details of the final price are
included in the offer document. The
offer document filed thereafter with
ROC is called a prospectus.

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Prospectus

 It a document which contains invitation

to public to apply for the shares,
debentures or other securities of the
company.
 Companies Act, 1956 has prescribed
various details to be furnished in the
prospectus.

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 It contains the name of promoters,
objects and terms of issue, underwriting
arrangement if any,credit rating in case
of debt security,capital structure of the
company, key managerial personnel,
risk factors etc.

 Before issuing a prospectus it has to be

got vetted by SEBI and have to in
accordance with the stringent SEBI
norms in this regard.
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Book- Building
 Book Building means a process
by which demand for the securities
proposed to be issued by a body
corporate is elicited and built up
and the price for such securities is
assessed.

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 As a part of the process, the issuer
company should appoint eligible
merchant bankers as book runners.

 The primary responsibility of building the

books is that of the lead book runner.

 The book runner may appoint SEBI

registered intermediaries who are
permitted to carry on activity as
‘underwriters’ as syndicate members.
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