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Capital Markets
A capital market is one in which individuals and institutions trade
financial securities. Organizations and institutions in the public
and private sectors also often sell securities on the capital
markets in order to raise funds. Thus, this type of market is
composed of both the primary and secondary markets.
Any government or corporation requires capital (funds) to finance
its operations and to engage in its own long-term investments. To
do this, a company raises money through the sale of securities stocks and bonds in the company's name. These are bought and
sold in the capital markets.
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Stock Markets
Stock markets allow investors to buy and sell shares in publicly
traded companies. They are one of the most vital areas of a
market economy as they provide companies with access to capital
and investors with a slice of ownership in the company and the
potential of gains based on the company's future performance.
This market can be split into two main sections: the primary
market and the secondary market. The primary market is where
new issues are first offered, with any subsequent trading going on
in the secondary market.
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Equity shares
An equity share, commonly referred to as ordinary share also
represents the form of fractional or part ownership in which a
shareholder, as a fractional owner, undertakes the maximum
entrepreneurial risk associated with a business venture. The
holders of such shares are members of the company and have
voting rights
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Deferred Shares:
These shares were earlier issued to Promoters or Founders for
services rendered to the company. These shares were known as
Founders Shares because they were normally issued to founders.
These shares rank last so far as payment of dividend and return of
capital is concerned. Preference shares and equity shares have
priority as to payment of dividend.
These shares were generally of a small denomination and the
management of the company remained in their hands by virtue of
their voting rights. These shareholders tried to manage the
company with efficiency and economy because they got dividend
only at last. Now, of course, they cannot be issued and they are
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1.Ordinary shares
These carry no special rights or restrictions. They rank after
preference shares as regards dividends and return of capital but
carry voting rights (usually one vote per share) not normally given
to holders of preference shares (unless their preferential dividend
is in arrears).
Some companies create more than one class of ordinary shares
e.g. A Ordinary Shares, B Ordinary shares etc. This gives
flexibility for different dividends to be paid to different
there may be 1 Ordinary shares and 0.01 Ordinary shares. If
each share had the right to one vote (and assuming the shares
were issued at their nominal value), then the 0.01 Ordinary
shareholders would get 100 votes per 1 paid while the 1
Ordinary shareholders would get 1 vote for paying the same
amount.shareholders or, for example, for pre-emption rights to
apply to some shares but not others.
In some cases, different classes of ordinary share may be of
different nominal values for example,
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4.Redeemable shares
The terms of redeemable shares give the company the option to
buy them back in the future; occasionally, the shareholder may
(also) have the option to sell them back to the company, although
thats much less common.
The option may arise at or after a specific date, between two
dates or be effective at any time the shares are in issue. The
redemption price is usually the same as the issue price, but can
be set differently. A company can only redeem shares out of
profits or the proceeds of a new share issue, which may restrict its
ability to redeem shares even if the directors would like to
exercise the option.
If a company chooses to have redeemable shares, it must also
have non-redeemable shares in issue. At no point can all of its
share capital be made up of redeemable shares.
5.Preference shares
These shares are called preference or preferred since they have a
right to receive a fixed amount of dividend every year. This is
received ahead of ordinary shareholders. The amount of the
dividend is usually expressed as a percentage of the nominal
value. So, a 1, 5% preference share will pay an annual dividend
of 5p. The full entitlement will be paid every year unless the
distributable reserves are insufficient to pay all or even some of
it. On a winding up, the holders of preference shares are usually
entitled to any arrears of dividends and their capital ahead of
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ordinary shareholders. Preference shares are usually nonvoting (or only have a vote only when their dividend is in arrears).
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Bond Markets
A bond is a debt investment in which an investor loans money to
an entity (corporate or governmental), which borrows the funds
for a defined period of time at a fixed interest rate. Bonds are
used by companies, municipalities, states and U.S. and foreign
governments to finance a variety of projects and activities. Bonds
can be bought and sold by investors on credit markets around the
world. This market is alternatively referred to as the debt, credit
or fixed-income market. It is much larger in nominal terms that
the world's stock markets. The main categories of bonds are
corporate bonds, municipal bonds, and U.S. Treasury bonds, notes
and bills, which are collectively referred to as simply "Treasuries."
(For more, see the Bond Basics Tutorial.)
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1. Public Issue
As the name suggests, public issue means selling securities to
public at large, such as IPO. It is the most vital method to sell
financial securities.
2. Rights Issue
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3. Private Placement
This is about selling securities to restricted number of classy
investors like frequent investors, venture capital funds, mutual
funds and banks comes under Private Placement.
4. Preferential Allotment
When a listed company issues equity shares to a selected number
of investors at a price that may or may not be pertaining to the
market price is known as Preferential Allotment.
The primary market is also known as the New Issue
Market (NIM) as it is the market for issuing long-term equity
capital. Since the companies issue securities directly to the
investors, it is responsible to issue the security certificates too.
The creation of new securities facilitates growth within the
economy.
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1. Auction Market
The auction market is a place where buyers and sellers convene
at a place and announce the rate at which they are willing to sell
or buy securities. They offer either the bid or ask prices,
publicly. Since all buyers and sellers are convening at the same
place, there is no need for investors to seek out profitable options.
Everything is announced publicly and interested investors can
make their choice easily.
2. Dealer Market
In a dealer market, none of the parties convene at a common
location. Instead, buying and selling of securities happen through
electronic networks which are usually fax machines, telephones or
custom order-matching machines.
Interested sellers deliver their offer through these mediums,
which are then relayed over to the buyers through the medium of
dealers. The dealers possess an inventory of securities and earn
their profit through the selling. A lot of dealers operate within this
market and therefore, a competition exists between them to
deliver the best offer to their investors. This makes them deliver
the best price to the investors. An example of a dealer market is
the NASDAQ.
The secondary markets are important for price discovery. The
market operations are carried out on stock exchanges.
A variation to the dealer market is the OTC market. OTC stands
for Over the Counter market. The concept came into existence
during the early 1920s period through Wall Street trading, which
implied the prevalence of an unorganized system of dealers who
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1.
Debt Instruments
2.
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3. Preference Shares
This instrument is issued by corporate bodies and the investors
rank second (after bond holders) on the scale of preference when
a company goes under. The instrument possesses the
characteristics of equity in the sense that when the authorised
share capital and paid up capital are being calculated, they are
added to equity capital to arrive at the total. Preference shares
can also be treated as a debt instrument as they do not confer
voting rights on its holders and have a dividend payment that is
structured like interest (coupon) paid for bonds issues.
Preference shares may be:
Irredeemable, convertible: in this case, upon maturity of the
instrument, the principal sum being returned to the investor is
converted to equities even though dividends (interest) had earlier
been paid.
Irredeemable, non-convertible: here, the holder can only sell his
holding in the secondary market as the contract will always be
rolled over upon maturity. The instrument will also not be
converted to equities.
Redeemable: here the principal sum is repaid at the end of a
specified period. In this case it is treated strictly as a debt
instrument.
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4.
Derivatives
These are instruments that derive from other securities, which are
referred to as underlying assets (as the derivative is derived from
them). The price, riskiness and function of the derivative depend
on the underlying assets since whatever affects the underlying
asset must affect the derivative. The derivative might be an
asset, index or even situation. Derivatives are mostly common in
developed economies.
Some examples of derivatives are:
forward
Futures
Options
Swaps
Derivative securities:
some basic concepts The Oxford dictionary defines a derivative as
something derived or obtained from another, coming from a
source; not original. In the field of financial economics, a
derivative security is generally referred to a financial contract
whose value is derived from the value of an underlying asset or
simply underlying. There are a wide range of financial assets that
have been used as underlying, including equities or equity index,
fixed-income instruments, foreign currencies, commodities, credit
events and even other derivative securities. Depending on the
types of underlying, the values of the derivative contracts can be
derived from the corresponding equity prices, interest rates,
exchange rates, commodity prices and the probabilities of certain
credit events.
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3.3 Swaps
Swaps are agreements between two counterparties to exchange a
series of cash payments for a stated period of time. The periodic
payments can be charged on fixed or floating interest rates,
depending on contract terms. The calculation of these payments
is based on an agreed-upon amount, called the notional principal
amount or simply the national.
Money Market
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2. Promissory Note:
The promissory note is the earliest types of bill. It is a written
promise on the part of a businessman today to another a certain
sum of money at an agreed future data. Usually, a promissory
note falls due for payment after 90 days with three days of grace.
A promissory note is drawn by the debtor and has to be accepted
by the bank in which the debtor has his account, to be valid. The
creditor can get it discounted from his bank till the date of
recovery. Promissory notes are rarely used in business these days,
except in the USA.
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6.Certificates of Deposit
Certificates of deposit (CDs) are certificates issued by a federally
chartered bank against deposited funds that earn a specified
return for a definite period of time. They are one of several types
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7.Commercial Paper
Commercial paper refers to unsecured short-term promissory
notes issued by financial and nonfinancial corporations.
Commercial paper has maturities of up to 270 days (the
maximum allowed without SEC registration requirement). Dollar
volume for commercial paper exceeds the amount of any money
market instrument other than T-bills. It is typically issued by large,
credit-worthy corporations with unused lines of bank credit and
therefore carries low default risk.
Standard and Poor's and Moody's provide ratings of commercial
paper. The highest ratings are A1 and P1, respectively. A2 and P2
paper is considered high quality, but usually indicates that the
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10.Bankers' Acceptances:
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11.Repurchase Agreements:
Repurchase agreementsalso known as repos or buybacksare
Treasury securities that are purchased from a dealer with the
agreement that they will be sold back at a future date for a higher
price. These agreements are the most liquid of all money market
investments, ranging from 24 hours to several months. In fact,
they are very similar to bank deposit accounts, and many
corporations arrange for their banks to transfer excess cash to
such funds automatically.
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Derivatives Markets
The derivative is named so for a reason: its value is derived from
its underlying asset or assets. A derivative is a contract, but in
this case the contract price is determined by the market price of
the core asset. If that sounds complicated, it's because it is. The
derivatives market adds yet another layer of complexity and is
therefore not ideal for inexperienced traders looking to speculate.
However, it can be used quite effectively as part of a risk
management program. (To get to know derivatives, read The
Barnyard Basics Of Derivatives.)
Examples of common derivatives
are forwards, futures, options, swaps and contracts-for-difference
(CFDs). Not only are these instruments complex but so too are the
strategies deployed by this market's participants. There are also
many derivatives, structured products and collateralized
obligations available, mainly in theover-the-counter (nonexchange) market, that professional investors, institutions and
hedge fund managers use to varying degrees but that play an
insignificant role in private investing.
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'Financial Instrument'
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Financial instruments are assets that can be traded. They can also
be seen as packages of capital that may be traded. Most types of
financial instruments provide an efficient flow and transfer of
capital all throughout the world's investors. These assets can be
cash, a contractual right to deliver or receive cash or another type
of financial instrument, or evidence of one's ownership of an
entity.
Shares
Shares are a unit of ownership in an organisation or corporation. It
is a part of the companys capital. Those individuals who are
getting shares from any company, are called Shareholders. When
a company wants to borrow and increase their capital, they issue
their shares in the stock market (exchange) for their investors.
However, companies also require to refund the amount from their
Net Profit. Therefore, shares play a significant role in the lives of
companies and investors / shareholders. Companies can issue two
types of shares, which they offer to investors/shareholders. The
two types of shares are:
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Bonds
Bonds are issued by the banks, organisations and financial
institutions. They issue bonds for getting an amount of money
from public (as a loan) and commit them a refund with an actual
interest and within a maturity period. They issue their bonds for
financing their capital expenses and their various projects or
activities.
This is one of the most frequently used methods for increasing
their capital and profits. When companies offer their bonds to
public, they define a specified interest rate and maturity period in
an applicant form.
Bonds have various types(i.e risk free bonds, high interest bonds,
etc.) and different companies issued various types of bond to
public
Debentures
Debenture is an instrument which is used by the Corporations and
Government for getting a loan from public and it is given under
the companys Stamp Act. Corporations and Government can
secure their debenture on company assets which it issues as long
term loans. In Debentures, companies are required to announce a
fixed return at the time of issuing.
Therefore, holders know that, how much amount they will get in
future by issuer. Debentures have various advantages for holders
and issuers. It implies that holders know that how much amount
they will get in future, therefore they do not worry about their
payment and, in general, debentures are freely transferable by
their holder to others. Therefore, holders have a right to transfer
their shares to anyone before their redemption.
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Fixed Deposit
Fixed Deposit is that kind of bank account, where the amount of
deposit is fixed for a specified period of time. All Commercial
banks are given these opportunities to their customers for
opening a fixed account in their bank. In a Fixed account, the
amount of deposit is fixed, which means we cannot withdraw an
unlimited amount from this account, therefore it is also called a
Fixed Deposit.
If an account holder wants to withdraw a small amount of money
from their account, then he will require closing of the Fixed
deposit account. The main purpose of account holders to open
this account, is to earn interest money from their actual money,
which is given by the banks during a specified period of time.
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Gold ETF
Gold ETF is one of the most popular funds as it does not get
influenced due to stock fluctuations or inflation. Gold ETF fund is a
fiscal instrument which works as a mutual fund and whose prices
are depending upon the market price of gold. When the market
price of gold increases, gold ETF prices also increase.
The services of Gold ETF fund transfers is available in few stock
exchanges, such as Mumbai, Paris, Zurich and New York. Gold ETF
fund provides a variety of advantages to their holders, such as
Low cost, Tax advantage, Gold purity, there is no need to worry
about safety, Issue of selling gold bars and also beneficial in short
term investments.
Energy:
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mainly oil and gas like crude oil, jet fuel, gasoline, fuel oil, heating
oil, natural gas and propane. electricity as well as renewable
forms of energies like solar and wind energy
weather:
weather is obviously not a tradable asset but we include them
here because, over the last years, many derivative products
whose underlying is weather (temperature, wind, precipitation)
have been forth and traded.
Agricultural:
Livestock: live hogs, cattle and pork bellies. Grain: corn, wheat,
soybeans, soyoil, sunflower seed and oil. Forest products group:
lumber and plywood. Textiles: cotton. Foodstuffs: cocoa, coffee,
orange juice, rice, cheddar, and sugar.
Metals Base metals:
aluminium, copper, zinc, nickel, and lead, tin, iron. Precious
metals: gold, silver, platinum, rare metals (palladium, titanium).
SPOT MARKETS
Spot markets are organized exchanges where commodity
products can daily be traded (by large amounts, even). Typical
examples are the CME (Chicago Mercantile Exchange), the MCE
(Mid America Commodity Exchange).
FUTURES MARKETS
At their very early stage, commodity markets futures trading
exchanges, served the purpose of hedging against price
fluctuations in agricultural commodities. Sellers (farmers) and
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