Capital Market

A market in which individuals and institutions trade financial securities. Organizations/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.

Both the stock and bond markets are parts of the capital markets. For example, when a company conducts an IPO, it is tapping

the investing public for capital and is therefore using the capital markets. This is also true when a countrys government issues

Treasury bonds in the bond market to fund its spending initiatives.

When referring to a capital market, it is important to note that the term can refer to a rather broad range of products and

services that are associated with finances and investments. To that end, a capital market will include such components as the

stock market, commodities exchanges, the bond market, and just about any physical or virtual facility or medium where debt

and equity securities can be bought or sold. Ads by Google

market for securities with a very broad reach, the capital market is an ideal environment for the creation of strategies that can

result in raising long-term funds for bond issues or even mortgages. At the same time, the capital market provides the medium

for short-term fund strategies as well. Essentially, any type of financial transaction that is meant to result in the buying and

selling of securities and commodities for profit can rightly be considered part of the capital market.

Institutions are also part of the framework of the capital market. Stock exchanges are one of the more visible examples of

established operations that give form and function to the capital market. Along with the stock exchanges, support

organizations such as brokerage firms also form part of the capital market. Over the counter markets are also included in the

working definition for a capital market. By providing the mechanisms that make trading possible, these outward expressions of

the capital market make it possible to keep the process ethical and more easily governed according to local laws and customs.

Capital Market Types

There is two types of capital market

1. Primary market

The primary market is that part of the capital markets that deals with the issuance of new securities.
Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done through a syndicate of

securities dealers. The process of selling new issues to investors is called underwriting. In the case of a

new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the
price of the security offering, though it can be found in the prospectus.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities
are sold for the first time. Therefore it is also called the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issues new security certificates to the investors.

Primary issues are used by companies for the purpose of setting up new business or for expanding or
modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation in the economy.

The new issue market does not include certain other sources of new long term external finance, such as

loans from financial institutions. Borrowers in the new issue market may be raising capital for converting
private capital into public capital; this is known as going public.

The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

Initial public offering;

Rights issue (for existing companies);

Preferential issue.

Initial public offering

An initial public stock offering (IPO) referred to simply as an offering or flotation, is when a company

issues common stock or shares to the public for the first time. They are often issued by smaller, younger
companies seeking capital to expand, but can also be done by large privately-owned companies looking
to become publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type
of security to issue (common or preferred), best offering price and time to bring it to market.

An IPO can be a risky investment. For the individual investor, it is tough to predict what the stock or

shares will do on its initial day of trading and in the near future since there is often little historical data

with which to analyze the company. Also, most IPOs are of companies going through a transitory growth
period, and they are therefore subject to additional uncertainty regarding their future value.

Rights issue

Under a secondary market offering or seasoned equity offering of shares to raise money, a company can

opt for a rights issue to raise capital. The rights issue is a special form of shelf offering or shelf

registration. With the issued rights, existing shareholders have the privilege to buy a specified number of

new shares from the firm at a specified price within a specified time. A rights issue is in contrast to an

initial public offering (primary market offering), where shares are issued to the general public through
market exchanges.

2. Secondary market

The secondary market, also known as the aftermarket, is the financial market where previously issued

securities and financial instruments such as stock, bonds, options, and futures are bought and sold.[1].

The term secondary market is also used to refer to the market for any used goods or assets, or an
alternative use for an existing product or asset where the customer base is the second market (for

example, corn has been traditionally used primarily for food production and feedstock, but a second- or

third- market has developed for use in ethanol production). Another commonly referred to usage of

secondary market term is to refer to loans which are sold by a mortgage bank to investors such as Fannie
Mae and Freddie Mac.

With primary issuances of securities or financial instruments, or the primary market, investors purchase

these securities directly from issuers such as corporations issuing shares in an IPO or private placement,

or directly from the federal government in the case of treasuries. After the initial issuance, investors can
purchase from other investors in the secondary market.
The secondary market for a variety of assets can vary from loans to stocks, from fragmented to

centralized, and from illiquid to very liquid. The major stock exchanges are the most visible example of

liquid secondary markets in this case, for stocks of publicly traded companies. Exchanges such as the

New York Stock Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid

secondary market for the investors who own stocks that trade on those exchanges. Most bonds and

structured products trade over the counter, or by phoning the bond desk of ones broker-dealer. Loans
sometimes trade online using a Loan Exchange.

Stock Market Basics

What is a Stock Exchange?

A common platform where buyers and sellers come together to transact in stocks and shares. It may be a physical entity where

brokers trade on a physical trading floor via an open outcry system or a virtual environment.

What is electronic trading?

Electronic trading eliminates the need for physical trading floors. Brokers can trade from their offices, using fully automated

screen-based processes. Their workstations are connected to a Stock Exchanges central computer via satellite using Very Small

Aperture Terminus (VSATs). The orders placed by brokers reach the Exchanges central computer and matched electronically.

What is an Index?

An Index is a comprehensive measure of market trends, intended for investors who are concerned with general stock market

price movements. An Index comprises stocks that have large liquidity and market capitalization. Each stock is given a

weightage in the Index equivalent to its market capitalization. At the NSE, the capitalization of NIFTY (fifty selected stocks) is

taken as a base capitalization, with the value set at 1000. The Index value compares the days market capitalization vis-a-vis

base capitalization and indicates how prices in general have moved over a period of time.

How does one execute an order?

Select a broker of your choice and enter into a broker-client agreement and fill in the client registration form. Place your order

with your broker preferably in writing. Get a trade confirmation slip on the day the trade is executed and ask for the contract

note at the end of the trade date.

Why does one need a broker?

As per SECP (Securities and Exchange Commission of Pakistan) regulations, only registered members can operate in the stock

market. One can trade by executing a deal only through a registered broker of a recognized Stock Exchange or through a SECP-

registered sub-broker.

What is an ex-dividend date?

The date on or after which a security begins trading without the dividend (cash or stock) included in the contract price.

What is a Bonus Issue?

While investing in shares the motive is not only capital gains but also a proportionate share of surplus generated from the

operations once all other stakeholders have been paid. But the distribution of this surplus to shareholders seldom happens.

Instead, this is transferred to the reserves and surplus account. If the reserves and surplus amount becomes too large, the

company may transfer some amount from the reserves account to the share capital account by a mere book entry. This is done

by increasing the number of shares outstanding and every shareholder is given bonus shares in a ratio called the bonus ratio

and such an issue is called bonus issue. If the bonus ratio is 1:2, it means that for every two shares held, the shareholder is

entitled to one extra share. So if a shareholder holds two shares, post bonus he will hold three.

What is a Split?

A Split is book entry wherein the face value of the share is altered to create a greater number of shares outstanding without

calling for fresh capital or altering the share capital account. For example, if a company announces a two-way split, it means

that a share of the face value of Rs 10 is split into two shares of face value of Rs 5 each and a person holding one share now

holds two shares.

What is a Buy Back?

As the name suggests, it is a process by which a company can buy back its shares from shareholders. A company may buy back

its shares in various ways: from existing shareholders on a proportionate basis; through a tender offer from open market;

through a book-building process; from the Stock Exchange; or from odd lot holders.

A company cannot buy back through negotiated deals on or off the Stock Exchange, through spot transactions or through any

private arrangement. Clearing and Settlement

When does one deliver the shares and pay the money to broker?

As a seller, in order to ensure smooth settlement you should deliver the shares to your broker immediately after getting the

contract note for sale but in any case before the pay-in day. Simliarly, as a buyer, one should pay immediately on the receipt of

the contract note for purchase but in any case before the pay-in day.

What is an auction?

An auction is conducted for those securities that members fail to deliver/short deliver during pay-in. Three factors primarily

give rise to an auction: short deliveries, un-rectified bad deliveries, un-rectified company objections

Is there a separate market for auctions?

The buy/sell auction for a capital market security is managed through the auction market. As opposed to the normal market

where trade matching is an on-going process, the trade matching process for auction starts after the auction period is over.

What happens if the shares are not bought in the auction?

If the shares are not bought at the auction i.e. if the shares are not offered for sale,the Exchange squares up the transaction as

per SECP guidelines. The transaction is squared up at the highest price from the relevant trading period till the auction day or at

20 per cent above the last available Closing price whichever is higher.

Equities

What is equity?

Funds brought into a business by its shareholders is called equity. It is a measure of a stake of a person or group of persons

starting a business.

What does investing in equity mean?

When you buy a companys equity, you are in effect financing it, and being compensated with a stake in the business. You

become part-owner of the company, entitled to dividends and other benefits that the company may announce, but without any

guarantee of a return on your investments.