What is Capital Market

A capital market is simply any market where a government or a company can raise money (capital) to fund their operations and long term investment. Capital Market is characterized as the provider of long-term financing.

 The capital market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market intruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc.

Why Capital Markets Exist

Capital markets facilitate the transfer of capital (financial) assets from one owner to another. They provide liquidity.Liquidity refers to how easily an asset can be transferred without loss of value. A side benefit of capital markets is that the transaction price provides a measure of the value of the asset

Indian Capital Market Historical perspective

Stock Market was for a privileged few Lack of Transparency - High tones costs No use of Technology Outdated banking system Volumes - less than Rs. 300 cr per day

Indian Capital markets -Chronology

1994-Equity Trading commences on NSE 1995-All Trading goes Electronic 1996- Depository comes in to existence 1999- FIIs Participation- Globalisation 2000- over 80% trades in Demat form 2003- T+2 settlements in all stocks

Factors contributing to growth of Indian Capital Market

Establishment of Development banks & Industrial financial institution. Legislative measures Growing public confidence Increasing awareness of investment opportunities Growth of underwriting business Setting up of SEBI Mutual Funds Credit Rating Agencies

Capital Markets - Reforms

Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Dematerialization of Shares - risks of fraudulent paper eliminated Entry of Foreign Investors Introduction of Derivative products - Stock Futures &Options

Significance, Role or Functions of Capital Market

Mobilization of Savings Capital Formation Speed up Economic Growth and Development Proper Regulation of Funds Continuous Availability of Funds

Capital market instruments

Debt Instruments Equities Preference Shares Derivatives

Primary Market
The primary market is also known as the new issues market. It deals with new securities being issued for the first time. The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits. Funds raised may be for setting up new projects, expansion, diversification, modernisation of existing projects, mergers and takeovers etc.

Role of Primary Market

Capital formation - It provides attractive issue to the potential investors and with this company can raise capital at lower costs. Liquidity - As the securities issued in primary market can be immediately sold in secondary market the rate of liquidity is higher. Diversification - Many financial intermediaries invest in primary market; therefore there is less risk if there is failure in investment as the company does not depend on a single investor. The diversification of investment reduces the overall risk. Reduction in cost - Prospectus containing all details about the securities are given to the investors hence reducing the cost is searching and assessing the individual securities.

Features of Primary Market

It is the new issue market for the new long term capital. Here the securities are issued by company directly to the investors and not through any intermediaries. On receiving the money from the new issues, the company will issue the security certificates to the investors. The amount obtained by the company after the new issues are utilized for expansion of the present business or for setting up new ventures.

Prerequisites for Investor to Participate in Primary market Activities:

PAN Number Bank Account Demat Account

Types of issues
Public issues can be classified into 3 types: Initial Public Offering (IPO) Fresh issue of shares or selling existing securities by an unlisted company for the first time is known as IPO. Listing and trading of securities of a company takes place in IPO. Rights Issue Rights issue is when the listed company issues new securities and provides special rights to its existing shareholders for buying the securities before issuing it to public. The rights are issued on particular ratio based on the number of securities currently held by the share holder.

 Preferential Issue It is the fresh issue of securities and shares by listed company. It is called as preferential as the shareholders with preferential shares get the preference when it comes to dividend disbursement.

Benefits
Price manipulation is very less in primary market compared to secondary market. There is no payment of brokerage, transaction fees, and stamp duty or service tax. Investors get the shares at same prices so market fluctuations do not affect

Disadvantages

Money is locked in for longer time, as it is a long term investment. The shares allotment for the investor takes few days in primary market compared to secondary.

Secondary Market
The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market. It also provides liquidity and marketability to existing securities. It also contributes to economic growth by channelising funds towards the most productive investments through the process of disinvestment and reinvestment

 Securities are traded, cleared and settled within the regulatory framework prescribed by SEBI. Advances in information technology have made trading through stock exchanges accessible from anywhere in the country through trading terminals. Along with the growth of the primary market in the country, the secondary market has also grown significantly during the last ten years.

Recent Developments in Capital Market of India

Establishment of SEBI The main functions of SEBI are: To regulate the business of the stock market and other securities market. To promote and regulate the self regulatory organizations. To prohibit fraudulent and unfair trade practices in securities market. To promote awareness among investors and training of intermediaries about safety of market. To prohibit insider trading in securities market.

To regulate huge acquisition of shares and takeover of companies

 Establishment of Creditors Rating Agencies Candid Performance of Indian Economy (FII FDI etc) Rising Electronic Transactions Growing Mutual Fund Industry Growing Stock Exchanges Investor's Protection

 Growth of Derivative Transactions Commodity Trading

 1) Issue of bonds : - Bond is an amount of money which has to be given at a certain date or dates in future. Bondholders receive interest payments at fixed rate and specific dates. Corporate issues bonds because interest rates which must pay investors are lower than rates of borrowing and holders can sell bonds to someone else before they due.

Corporations have five primary methods which are used to raise funds in capital market.

 2) Issue of preferred stock : - company choose this to raise capital. If a company have financial trouble the buyers of shares gets special status. If profits are limited then owners will be paid the dividend after bondholders receive the interest payments.

 3) Sell of common stock : - if financial condition of the company is good then it can raise the capital issue the common stock. Bank helps the companies to do the investment and issue stock. Investors gets interested if the company pays large dividends and offers steady income. Value of shares increases if investor expects the corporate earning to rise.
4) Borrowing:- companies used to raise short term capital by getting the loans from banks or other sources. After good market run the profits which the company gets can be used to finance their operating by retaining their earnings.