CAPITAL

MARKET

CAPITAL MARKET
The

market where investment

instruments like bonds, equities
and mortgages are traded is
known as the capital market.
The primal role of this market is to
make investment from investors
who have surplus funds to the
ones who are running a deficit.

The capital market offers both

long term and overnight funds.
The
different types of financial
instruments that are traded in
the capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange
instruments,
> hybrid instruments and
> derivative instruments.

Nature of capital market

The nature of capital market is
brought out by the following facts:
It Has Two Segments
It Deals In Long-Term Securities
It Performs Trade-off Function
It Creates Dispersion In Business
Ownership
It Helps In Capital Formation
It Helps In Creating Liquidity

Types of capital market

There are two types of capital
market:
Primary market,
Secondary market

Primary Market
It is that market in which
shares, debentures and other
securities are sold for the first
time for collecting long-term
capital.
This market is concerned with
new issues. Therefore, the
primary market is also called
NEW ISSUE MARKET.

In this market, the flow of funds

is from savers to borrowers
(industries), hence, it helps
directly in the capital formation
of the country.
The money collected from this
market is generally used by the
companies to modernize the
plant, machinery and buildings,
for extending business, and for
setting up new business unit.

Features of Primary
Market

It Is Related With New Issues

It Has No Particular Place
It Has Various Methods Of Float
Capital: Following are the methods of
raising capital in the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public
Offer
It comes before Secondary Market

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.

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

Features of Secondary
Market

It
It
It
It

Creates Liquidity
Comes After Primary Market
Has A Particular Place
Encourage New Investments

CAPITAL MARKET RISK

Investment in long term
financial instruments is
accompanied by high capital
market risks. Since there are two
types of capital markets- the
stock market and the bond
market.
So risks are present in both the
market.

Risk in the Stock Market

Stock prices keep fluctuating
over a wide range unlike the
bank deposits or government
bonds.
The efficient market hypothesis
shows the effect of fundamental
factors in changing the price of
the stock market.

 The

Efficient Market Hypothesis

shows that all price movements are
random whereas there are plenty
of studies that reflect the fact that
there is a specific trend in the stock
market prices over a period of
time.
Research has shown that there are
certain psychological factors that
shape the stock market prices.

Sometimes the market behaves

illogically to any economic news.
The stock market prices can be
diverted in any direction in response
to press releases, rumors and mass
panic.

The stock market prices are also

subject to speculation. In the short
run the stock market prices may be
very volatile due to the occurrences
of the fast market changing events.

Risk in the Bond Market

Capital market risk in the bond

market arises due to interest rate
changes. There is an inverse
relationship existing between the
interest rate and the price of the
bond. Hence the bond prices are
sensitive to the monetary policy of
the country as well as economic
changes.

INDIAN CAPITAL MARKET

TheIndian Capital Marketis one of

the oldest capital markets in Asia
which evolved around 200 years ago.
Chronology of the Indian capital
markets
>1830s:Trading of corporate
shares and stocks in Bank and cotton
Presses in Bombay.
>1850s:Sharp increase in the
capital market brokers owing to the
rapid development of commercial

>1860-61:Outbreak of
theAmerican Civil Warand
'Share Mania' in India.
>1894:Formation of
theHamada Shares and Stock
Brokers Association.
>1908:Formation of
theCalcutta Stock Exchange
Association.

The pattern of growth in

the Indian capital markets
in the post independence
regime can be analyzed
from the following graphs:

From the above graph we

find that the number of
stock exchanges in India
increased at a crawling
pace till 1980 but
witnessed a sharp rise
thereafter till 1995.

The following diagram

shows the trend in the no.
of listed companies
participating in theIndian
Capital Market. Here again
we register a sharp rise
after 1980. The number of
stocks issued by the listed
companies also shows a

CAPITAL MARKET REPORT

TheCapital Market Reportis
prepared by thecapital market
analystsand is of various types.
There are four different kinds
ofcapital market reports: >10-K
Reports,
>10-Q Reports,
>Form 8-K Reports,
>the Proxy Statements.

10-K Reports

This is a kind ofannual reportof the

company that contains information of
the company's business, finances and
management.
This informs us about the bylaws of
the company, other legal documents
and the lawsuits that the company
may have a hand in.

10-Q Reports or the Quarterly

Reports

The quarterly reports are the

abridged form of the annual reports.
They are issued at an interval of three
months.

Form 8 K Report

The companies that are

publicly traded are required to
maintain the Form 8-K where they
record any material eventthat
might have affected the financial
status of the company

Proxy
Statements

The proxy statement consists

of business issues that need to be

CAPITAL MARKET
INVESTMENT

Capital market investmenttakes

place through thebond marketand
thestock market.
The capital market is basically the
financial pool in which different
companies as well as the
government can raise long term
funds.
Capital market investmentthat takes
place through the bond and the stock
market may be elucidated in the
following heads.

Capital market investments in the

stock market

The stock market is basically the

trading groundcapital market
investmentin the following:
i) Companys stocks
ii) Derivatives
iii) Other securities
The capital market investments in the
stock market take place by:
1) Small individual stock
investors
2) Large hedge fund traders.
The capital market investments can

2) Trading can also occur in

thevirtual exchangewhere trading is
done in the computer network.
The investors in the stock market
have the liberty to buy or sell the
stock that they are holding at their
own discretion unlike the case
ofgovernment securities, bonds or
real estate.
The stock exchanges basically
function as theclearing house for
such liquid transactions.
The capital market investments in

Capital Market Investments in the

Bond Market

The bond market is afinancial

marketwhere the participants buy
and selldebt securities.
The bond market is also differently
known as the debt, credit or fixed
income market.
There are different types of bond
markets based on the different types
of bonds that are traded. They are:
Corporate,
Government and agency,
Municipal,
Bonds backed by mortgages &

The bonds, except for the

corporate bonds do not have formal
exchanges but are tradedover-thecounter.
Individual investors are attracted to
the bond market and make
investments through thebond funds,
closed-end-funds or the unit
investment trusts.
Another way of investing directly in
the bond issue is theExchangetraded-funds.
The capital market investment in the
bond market is done by:
Institutional investors