1-5 PM - Intro To Capital Markets

IVP Domain sessions : Introduction to Capital Markets
June 09, 2011
Indus Valley Partners Confidential
Agenda
Finance Overview Market Overview Introduction to Financial Market Introduction to Financial System Classification of Financial Markets Market Participants
Finance Overview
Market Overview
Introduction to Financial Market
Introduction to Financial System
Classification of Financial Markets
Market Participants
Agenda
What is Finance?
Finance Overview
Market Overview
Market Participants
What is Finance?
Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers.
Finance is distinct from economics in that it addresses not only how resources are allocated but also under what terms and through what channels The study of finance requires a basic understanding of: Securities Corporate law Financial institutions and markets
Finance Overview
Market Overview
Market Participants
Agenda
What is a Market ?
Finance Overview
Market Overview
Market Participants
What is a Market?
Market any place or process that brings together buyers and sellers with a view to agreeing a price
The basis of how an economy operates through production and subsequent exchange
Finance Overview
Market Overview
Market Participants
What is a Market?
Demand the amount consumers desire to purchase at various alternative prices Demand reflects the degree of value consumers place on items price and satisfaction gained from purchase (utility)
Finance Overview Market Overview Introduction to Financial Market
Supply the amount producers are willing to offer for sale at various prices Supply reflects the cost of the resources used in production and the returns/profits required
Market Participants
Agenda
INTRODUCTION TO FINANCIAL MARKETS
Finance Overview
Market Overview
Market Participants
Financial Market
A financial market is a place where buyers and sellers of financial instruments/assets come together and financial transaction takes place.
Financial instruments/assets includes cash, cheque, stocks, bonds, derivatives etc.

Financial system: Transfers funds from economic entities that are surplus in funds to economic entities that are deficient in funds
Finance Overview
Market Overview
Market Participants
Role of Financial Market Price Discovery Process Determination of the price of trade asset Interaction of buyers and sellers in a financial market
Liquidity Mechanism to sell financial assets for the seller Ease of availability of assets for the buyer
Reduction of search & information costs Search Cost Explicit Cost e.g.. Advertisement Cost Implicit Cost e.g. Opportunity Cost Information Cost Cost associated with assessing the amount and likelihood of generation of expected cash flow
Finance Overview
Market Overview
Market Participants
Classification of Financial Market
Financial market
Type of Issuance
Maturity of Claim
Type of Claim
Finance Overview
Market Overview
Market Participants
10
Classification of Financial Market (contd.)
Type of Issuance
Primary market Secondary market
Money Market Maturity of Capital Market
Claim
Debt Market Equity Market FX markets Commodities
Type of Claim
Finance Overview
Market Overview
Market Participants
11
Agenda
INTRODUCTION TO FINANCIAL SYSTEM
Finance Overview
Market Overview
Market Participants
12
Financial System
Finance Overview
Market Overview
Market Participants
13
Financial System
14
Financial System
Finance Overview
Market Overview
Market Participants
15
Financial System (contd.)

The household is the primary provider of funds to businesses and government. Households must accumulate financial resources throughout their working life times to have enough savings (pension) to live on in their retirement years Financial intermediaries transform the nature of the securities they issue and invest in Banks, trust companies, credit unions, insurance firms, mutual funds Market intermediaries simply help make markets work Investment dealers Brokers
Finance Overview
Market Overview
Market Participants
16
Agenda
Lets get back to Financial Markets Now!!!
Finance Overview
Market Overview
Market Participants
17
Maturity of Claim
Money Markets Capital markets
Finance Overview
Market Overview
Market Participants
18
Classification of Financial Markets Maturity of Claim
Money markets
Money Market consists of debt securities issued with an original maturity of less than a year The instruments are usually highly marketable Examples are T-bills, Call Money market, CDs, CPs, Repos, Eurodollars, LIBOR Market
Capital markets
Capital Markets are markets where securities with original maturity of more than one year are issued and traded Examples are equity shares, government bonds, debentures, etc
Finance Overview
Market Overview
Market Participants
19
Classification of Financial Markets (contd.)
Type of Claim
Debt markets Equity Markets FX markets Commodities
Finance Overview
Market Overview
Market Participants
20
Classification of Financial Markets Type of Claim
Debt Markets
Short term and long term bonds Short term debt
Treasury Bills Commercial Paper
Long term debt

Government Securities Bonds
Claim is a fixed dollar amount
Finance Overview
Market Overview
Market Participants
21
Equities market
Financial instrument representing ownership in a company Also known as stock Features
Residual Claim Limited liability Voting Rights
Finance Overview
Market Overview
Market Participants
22
FX markets
Market with largest daily turnover Over-the-counter (OTC) market Largely an inter-bank market Money denominated in one currency is bought and sold with money denominated in another currency Spot market
Immediate transaction
Forward market
Transactions take place at a specified future date
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Commodities market
Huge market worldwide Major exchanges are
LME (Metals) CME (agri-commodities)
Three major categories

Agricultural products fibers, grains, livestock Energy crude oil, natural gas Metals copper, gold, silver
Good investment during period of economic growth

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Classification of Financial Markets (contd.)
Type of Issuance
Primary Markets Secondary markets
Finance Overview
Market Overview
Market Participants
25
Classification of Financial Markets Type of Issuance
Primary Market
The market in which new securities are issued to investors for the first time Direct selling to public New securities are created
Secondary market
The market where buyers and sellers trade in securities already issued Securities are transferred
26
Raising Capital
Early Stages Venture Capital
Initial Public Offering Primary Secondary
After the IPO Rights Issue Season Offers Private Placement
Finance Overview
Market Overview
Market Participants
27
The Initial Public Offering

An initial public offering (IPO) is the first sale of shares to the public. This sale is usually managed by an underwriting firm or a group of underwriting firms. These are firms that buy an issue of securities from a company and resell it to the public. For large issues, a group of underwriters called a syndicate is formed with the principal underwriter being called the lead manager.
Finance Overview
Market Overview
Market Participants
28
The Initial Public Offering

An IPO is called a primary offering when new shares are sold. An IPO is called a secondary offering when the companys founders and the venture capitalist cash in some of their grains by selling shares. IPOs commonly consist of both primary and secondary offerings.
Finance Overview
Market Overview
Market Participants
29
The Initial Public Offering - Pricing
Since the firm is going public, there is no established price. Valuation/Due Diligence
Banker and company project the companys future earnings and free cash flows
The banker would examine market data on similar companies.
Price set to place the firms P/E and M/B ratios in line with publicly traded firms in the same industry having similar risk and growth prospects.
On the basis of all relevant factors, the investment banker would determine a ballpark price, and specify a range
Finance Overview
Market Overview
Market Participants
30
Finance Overview
Market Overview
Market Participants
31

Book Building The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. Investors place their order into the 'electronic book managed by the book runner. This process is called 'bidding' and is similar to open auction. Bids cannot be entered less than the floor price of the range decided. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include Price Aggression Investor quality Earliness of bids, etc. The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. Allocation of securities is made to the successful bidders. Book Building is a good concept and represents a capital market which is in the process of maturing.
Introduction to Financial Market Introduction to Financial System Classification of Financial Markets Market Participants
32 32
Finance Overview
Market Overview
The Initial Public Offering - Process

Legal T 3-6 months Marketing Appoint Listing Agent/Lead manager
Due Diligence, Required Financial Statements Posting, Valuation, Deal Structure Prepare prospectus
T 30-90 days Apply for Listing & Regulatory Approval (through listing agents) Pre-marketing to institutions Exchange Listing admission Regulators, prospectus
T 14 days
Road Show and Marketing to investors
Book Building
Price Fixing, Allocation
Trading
List on Exchange, Start Trading
Finance Overview
Market Overview
Market Participants
33
After the IPO

Seasoned Offering: Sale of securities by a firm that is already publicly traded. Rights Issue: an issue of securities which is offered only to existing shareholders. Private Placement: Sale of securities to a limited number of investors without a public offering.
Finance Overview
Market Overview
Market Participants
34
Secondary Market
Purchases Thesales of existing stocks and bonds occur in the secondary market. and Secondary Market Transactions in the secondary market do not provide additional funds to the firm. The secondary market increases the liquidity of securities outstanding and lowers the required returns of investors. Composed of organized exchanges like the New York Stock Exchange and American Stock Exchange plus the over-the-counter (OTC) market.
Finance Overview
Market Overview
Market Participants
35
Listed and OTC Instruments
The Secondary Listed Instruments

Equity Bonds Options Futures
Market
OTC Instruments
Forwards Swaps
Exotic Derivatives
Finance Overview
Market Overview
Market Participants
36
Trade Life Cycle
Finance Overview
Market Overview
Market Participants
37
Agenda
MARKET PARTICIPANTS
Finance Overview
Market Overview
Market Participants
38
Securities Market
Market Participants:
Banks & Brokerage Firms Mutual Funds & Hedge Funds Investment Managers Corporate Individuals
Participants can also be classified in terms of service providers and service users.
Banks and Brokerage firms Sell side (as they provide services of deal execution, clearing and settlement services, custody etc.) Funds/Investment Managers/Corporates /Individuals Buy side ( as they are the buyers of the above services)
Finance Overview
Market Overview
Market Participants
39
Participants- Sell Side

Functions of Brokerage firms
Assist customers in buying and selling securities Provide a custody service (safekeeping) for the assets Provide periodic statements of assets
Brokers
Transact on customers account and dont run positions of their own Get the revenue from the commissions they charge
Execution Brokers Execution Brokers Execution Brokers
Dealers
Invest their own capital and act as principal to the trade Get their revenue on the basis of the spread between the buying and selling price
Prime Broker(s)
Institutional Investor
Finance Overview
Market Overview
Market Participants
40
Participants Buy side

Investment managers support accounts of institutions like pension funds, mutual funds or highly wealthy individuals (read Hedge Funds). They are also called asset managers The fees charged by the manager is based on
Portfolio size Fixed fees per portfolio Performance based fees
Participant profile
Investors Long term view on the market, about 3 5 years. Speculators Short term view on the market, could be even intra day. Arbitrageurs Riskless profits they look for opportunities, any mis-pricing etc. that may take place in the market.
Finance Overview
Market Overview
Market Participants
41
Market Makers
...a member of an exchange who is mandated by the exchange to maintain a market in the securities assigned to him
Functions
Maintain current prices for their assigned securities Act as an agent for floor brokers Buy or sell from their own account when there is a temporary shortage of either buyers or sellers Bring buyers and sellers together
Finance Overview
Market Overview
Market Participants
42
Financial Markets - Infrastructure support
Settlement and Clearing Corporations
Facilitate Settlement of and clearing of securities and funds
Depositorie s/ Custodian Banks

Safekeeping of securities and settlement Facilitate Post trade and Asset servicing activities.
Exchanges
Facilitate efficient price discovery and reduces counterparty risk
Finance Overview
Market Overview
Market Participants
43
ANY QUESTIONS ???
For any query/clarification required pls send a mail to Sahil Goyal [sagoyal@ivp.in]
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THANK YOU
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1-5 PM - Intro To Capital Markets

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IVP Domain sessions : Introduction to Capital Markets

June 09, 2011

Indus Valley Partners Confidential

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

INTRODUCTION TO FINANCIAL MARKETS

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Financial instruments/assets includes cash, cheque, stocks, bonds, derivatives etc.

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Classification of Financial Market

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Classification of Financial Market (contd.)

Primary market Secondary market

Money Market Maturity of Capital Market

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

INTRODUCTION TO FINANCIAL SYSTEM

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Indus Valley Partners Confidential

Indus Valley Partners Confidential