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Meaning and Concept of Capital Market

Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking 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. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting. Significance, Role or Functions of Capital Market

Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development.

Let us get acquainted with the important functions and role of the capital market. 1. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments. 2. Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. 3. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitableinterest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. 4. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure.

5. Proper Regulation of Funds : Capital markets not only helps in fundmobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. 6. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. 7. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related tothe stock exchanges. Thus marketability in the capital market becomes easy. These are the important functions of the capital market.

Final Glance and Conclusion on Capital Market

The lack of an advanced and vibrant capital market can lead to underutilization of financial resources. The developed capital market also provides access to the foreign capital for domestic industry. Thus capital market definitely plays a constructive role in the over all development of an economy. Capital market instruments are responsible for generating funds for companies, corporations and sometimes national governments. These are used by the investors to make a profit out of their respective markets. There are a number of capital market instruments used for market trade, including -

Stocks Bonds Debentures Treasury-bills Foreign Exchange Fixed deposits, and others

Capital market is also known as Securities Market because long term funds are raised through trade on debt and equity securities. These activities may be conducted by both companies and governments. This market is divided into:

primary capital market and

secondary capital market. The primary market is designed for the new issues and the secondary market is meant for the trade of existing issues. Stocks and bonds are the two basic capital market instruments used in both the primary and secondary markets.

There are three different markets in which stocks are used as the capital market instruments: the physical, virtual, and auction markets. Bonds, however, are traded in a separate bond market. This market is also known as a debt, credit, or fixed income market. Trade in debt securities is done in this market. These include: the T-bills and Debentures. These instruments are more secure than the others, but they also provide less return than the other capital market instruments. While all capital market instruments are designed to provide a return on investment, the risk factors are different for each and the selection of the instrument depends on the choice of the investor. The risk tolerance factor and the expected returns from the investment play a decisive role in the selection by an investor of a capital market instrument. The instruments should be selected only after doing proper research in order to increase one. Stock Market Investors and security issuers both participate in stock markets. Different sized entities participate in stock market activities, ranging from small investors to the governments, corporations, large hedge fund traders, and banks. Corporations, governments, and companies issue securities on the stock market to collect funds. The stock market acts as a platform for companies to raise money for their business and investors to invest in securities.When both the buyers and sellers in stock markets are institutions, rather than individuals, the stock market principle is more institutionalized. The emergence of this institutional investor concept has brought some improvements to stock market operations around the world. Stock markets can exist in both real and virtual arenas. Stock exchanges with physical locations carry out stock trading on trading floor. This method of conducting trading, where the traders enter verbal bids, is called open outcry. In virtual stock exchanges, trading is done online by traders who are connected to each other by a network of computers.In addition to acting as a market place for stock trading, stock markets also act as the clearinghouse for stock transactions.

This means that stock exchanges collect and deliver the securities and also guarantee payment to the seller. This ensures both the buyers and sellers of securities that their counterparts will not default on the transaction. Stock markets in various countries around the world have performed well due to financial sector reforms and integration. International flow of funds has raised the expertise of stock exchanges in the respective countries. Bond Market The bond market is a financial market that acts as a platform for the buying and selling of debt securities. The bond market is a part of the capital market serving platform to collect fund for the public sector companies, governments, and corporations. There are a number of bond indices that reflect the performance of a bond market. The bond market can also b called the debt debt market, credit market, or fixed income market. The size of the current international bond market is estimated to be $45 trillion. The major bond market participants are: governments, institutional investors, traders, and individual investors. According to the specifications given by the Bond Market Association, there are five types of bond markets. They are:

Corporate Bond Market Municipal Bond Market Government and Agency Bond Market Funding Bond Market

Mortgage Backed and Collateralized Debt Obligation Bond Market The bonds are usually specific to individual issues and there is a lack of liquidity in the bonds. This is the reason that most of the bonds are held by institutions like banks, mutual funds, and pension funds. Bond markets are generally decentralized, and unlike stocks and futures, there exists no common exchange for the bond market. The bond market is less volatile in nature than the stock market, and thus investors purchase the bond coupon and holds it until it matures. As risk associated with bond investment is less, the return received is also less.

Index

There are some risks that the bond investors have to face. The change in interest rate is the major risk that occurs in bond investment. The interest rate and value of bond are inversely

proportional to one another. When the rate of interest increases, the bond value falls considerably as the new issues pay a higher yield. Conversely, when the interest rate decreases, the bond value rises. The interest rate fluctuation may depend on the volatility of the bond market and also on the monetary policy of the country The bond market indices consist of bond listings, and they are a tool to mirror the performance of a particular security. Bond indices may vary with the type of the bonds. There are different indices for government bonds, high-yield bonds, corporate bonds, and mortgage-backed securities. Debentures Debentures are long-term Debt Instrument, which is not backed by Collaterals. Debentures are unsecured debt backed by the creditworthiness and reputation of the Debenture issuer and documented by an agreement called an indenture. Debentures are issued usually by large, financially strong companies with excellent bond ratings. One example of debenture is an unsecured bond. Debentures are long-term Debt Instrument issued by governments and big institutions for the purpose of raising funds. Debentures have some similarities with Bonds but the terms and conditions of securitization of Debentures are different from that of a Bond. A Debenture is regarded as an unsecured investment because there are no pledges (guarantee) or liens available on particular assets. Nonetheless, a Debenture is backed by all the assets which have not been pledged otherwise.Normally, Debentures are referred to as freely negotiable Debt Instruments. The Debenture holder functions as a lender to the issuer of the Debenture. In return, a specific rate of interest is paid to the Debenture holder by the Debenture issuer similar to the case of a loan. In practice, the differentiation between a Debenture and a Bond is not observed every time. In some cases, Bonds are also termed as Debentures and vice-versa. If a bankruptcy occurs, Debenture holders are treated as general creditors. The Debenture issuer has a substantial advantage from issuing a Debenture because the particular assets are kept without any encumbrances so that the option is open for issuing them in future for financing purposes. Treasury Bills Treasury Bills, also known as "T-Bills," are bonds that are issued by the US government, making them important both to the American economy and the world of finance. Although many people think The United States Department of Treasury is responsible for issuing these, they are actually issued by the Bureau of Public Department

Treasury Securities come in four separate denominations: Treasury Bills, Notes, Bonds, and Savings Bonds.Second to Savings Bonds, they are the most popular in the various secondary markets and easy options to use. TheTreasury Bills do not yield any interest before they mature. They are usually sold at discounts on their respective face values. In that respect they are like zero-coupon bonds. At the time of maturity the consumer is rewarded with positive returns.Investors in the US consider these Bills to be the safest forms of investment. The average term periods range from 28 days to 91 with a maximum of 130 days.Financial organizations like banks and primary dealers are the biggest consumers of T-Bills. Foreign Exchange (Forex) Market A Foreign Exchange Market or Forex market is a place where international currencies are traded. It has emerged to be the largest and decentralized financial market operating globally. It does not have any central authority and hence it is called an "Over The Counter" (OTC) market. It allows the traders to buy, sell, exchange and speculate on currencies. The major determinant of the exchange rate is the monetary value of the currency. Forex Market - A Global Entity: It is after the breakdown of Bretton Woods system in 1971 and most of the economies shifting to managed exchange rate regime, when the forex market started operating globally in a major way. The decade of 1990's witnessed major policy changes thereby re-orienting markets which reflected a rapid expansion of forex market in terms of: It is after the breakdown of Bretton Woods system in 1971 and most of the economies shifting to managed exchange rate regime, when the forex market started operating globally in a major way. The decade of 1990's witnessed major policy changes thereby re-orienting markets which reflected a rapid expansion of forex market in terms of:

Increased number of participants Increased transaction volumes Decline in transaction costs Efficient mechanisms of risk transfer

The forex market is the most liquid market in the world now and accounted for almost $4 trillion as daily turnover in 2010. The breakdown of this figure is as follows:

Foreign Exchange swaps - $1765 billion

Spot Transactions - $1490 billion Outright Forwards - $475 billion Options and other products - $207 billion Currency swaps - $43 billion

Forex Market Participants: The Forex market is different from stock market in the sense that the former follows a hierarchical order in its level of access. At the apex is the Inter-Bank market, consisting of commercial banks and security dealers. They account for 53 % of all transactions. Following Inter-Banks are the Smaller Banks, then the Multi National Corporations, large Hedge Funds and some Retail Forex market makers. Hence, the main participants are:

Banks Forex fixing Central banks Retail forex traders Commercial companies Hedge funds as speculator Non-banking forex companies Investment management firms Money transfer/Remittance companies

As the forex market follows OTC nature of market, the exchange rates (prices) of different currencies are not fixed. The price of a currency depends on the trading banks or market makers. The quoted price of any currency reflects London's market price, as it is the main trading centre in the world. Factors Influencing Forex Market: The changes in the forex market are a cumulative effect of economic factors, political conditions and market psychology.

Economic factors: The economic policies, balance of trade as well as inflation and growth rates of an economy influence the exchange rate of a currency. An economy's productivity also influences its exchange rates positively. Political conditions: Political stability is one of the key factors operating behind forex market fluctuations. Also events in one country may affect the exchange rate of neighboring country's currency. Market psychology: Forex markets are highly responsive to expectations and market perceptions. The participants often rely their decisions on long term trends of economic indicators. Public Deposits The public deposits refer to the deposits that are attained by the numerous large and small firms from the public. The public deposits are generally solicited by the firms in order to finance the working capital requirements of the firm. The companies offer interest to the investors over public deposits. The rate of interest, however, varies with the time period of the public deposits. The companies generally offer 8 to 9 percent interest rate on the deposits made for one year. The companies offer 9 to 10 percent interest rate over public deposits for two years while 10 to 11 percent interest rate is offered for the three year deposits. There are rules regulating the fixed deposits. According to the Companies Amendment Rules 1978, here is the list of rules for public deposits:

The maximum maturity period for a public deposit is 3 years The minimum maturity period for public deposits is 6 months The maximum maturity period for a public deposit for Non-Banking Financial Corporation is 5 years The public deposits of a company cannot go past 25% of free reserves and share capitals The companies asking for public deposits need to publish information regarding the position and financial performance of the firm

The companies having public deposits need to keep aside the 10% of the deposits by 30th April every year that will mature by 31st March next year. The various advantages of public deposits enjoyed by the companies are:

There is no involvement of restrictive agreement The process involved in gaining public deposit is simple and easy The cost incurred after tax is reasonable Since there is no need to pledge security for public deposits, the assets of firm that can be

mortgaged can be preserved The disadvantages of public deposits from the company's point of view are:

The maturity period is short enough Limited fund can be obtained from the public deposits

The advantages of public deposits enjoyed by the investors are:

The interest rate is higher than the other financial investment instruments

The fund maturity period is short The disadvantages of public deposits from the investors' pint of view are:

The interest that is charged on the public deposits does not enjoy tax exemption There is no pledging of security against public deposits Capital market reform

Capital market reform enables the capital markets to embrace new ideas and techniques affecting it. Capital market liberalization is one such capital market reform that is adopted by various countries to strengthen their economy.

A capital market is a place that handles the buying and selling of securities. This is the ideal place where both the governments and companies can raise their funds. The capital markets of all the countries have undergone a number of reforms in the past. Economic theories are made and implemented to reform the functionalities of the capital market. The prime objective behind all the policies and reforms is to strengthen the capital market of a particular country as much as possible.It has always been a big question to the economists Whether to allow the foreign investments in the country or not? Packaged with both advantages and disadvantages, the liberalization of the capital markets has always been controversial. In the 1980s and 1990s, when the US Treasury and International Monetary Fund (IMF) tried to push world-wide capital-market liberalization, there was enormous opposition. Economists were not in the support of free and unfettered markets. Now, when the capitalist countries, developing capitalist countries, under-developed countries and a large number of socialist countries have nodded their support to the capital market reform and capital market globalization, the global capital market has evolved in a new identity. The concept of capital market is not restricted to the share and bond trading in the developed capitalist countries only but is equally influenced by the capital markets of developing and underdeveloped countries as well. Now, the economic or financial change in one country can affect the capital market of other country in real time. Almost all the countries are now exposed to the inter-country trades and inter-country investments. The use of internet and electronic media has added some more feasibility to the practice. Exchange of information is fast and accurate with internet. Another advantage of this system is that it brings the entire world in a single place. The capital market is one of the industries that enjoys the maximum facility of the internet service. 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[disambiguation needed] 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. Primary markets create long term instruments through which corporate entities borrow from capital market. 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: Public issuance, including initial public offering; Rights issue (for existing companies); Preferential issue.

Methods for raising Finances The market for financial securities may be divided into two segments: the primary market and the secondary market. New issues are made in the primary market whereas outstanding issues are traded in the secondary market. There are three ways in which a company may raise finances in the primary market: (1) public issue, (2) rights issue, and (3) private placement or preferential allotment. Public issue involves sale of securities to the members of the public. The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market, is called the initial public offering (IPO). Subsequent are called seasonal offerings. Initial Public Offering: The decision to go public or more precisely the decisions to make an IPO so that that the securities of the company are listed on the stock market and publicly traded is a very important decision which calls for carefully within the benefits against costs. Benefits: * Access to a larger pool of capital * Respectability * Lower cost of capital compared to private placement. * Liquidity Costs * Dilution * Loss of flexibility * Disclosures and accountability * Periodic Costs.

Eligibility for IPOs: An Indian company, excluding certain banks, and infrastructure companies can make an IPO if it satisfies the following conditions: 1. The company has certain track profitability and a certain minimum net worth. 2. The securities are compulsorily listed on a recognized stock exchange which means that a certain minimum percent of each class of securities is offered to the public. 3. The promoters group (promoters, directors, friends, relatives, associates etc) is required to make a certain minimum contribution to the post issue capital. 4. The promoters contribution to equity is subject to a certain lock-up in period. Principal Steps in an IPO: A public issue involves sale of securities to the members of the public. It entails a fairly elaborate process involving the following steps after the proposed issue is approved by the board of directors and shareholders. 1. Appoint the lead manager /s 2. Appoint other intermediaries like co-mangers, underwriters, bank, brokers, and registrars. 3. Prepare the prospectus and file the same with the Registrar of Companies and SEBI. 4. Print the prospectus and dispatch the same to brokers. 5. Make the statutory announcements. 6. Collect and process the applicants 7. Establish the liability of underwriters. 8. Allot shares 9. Get the issues listed. The cost of an IPO is normally between 6 and 12 per cent spending on the size of the issues and the level of marketing effort. The important expenses incurred for public issue are: underwriting expenses, brokerage, fees for the managers and registrars, printing and postage expenses, advertising and publicity expenses, listing fees, as stamp duty. Seasoned offering: For most companies their IPO is seldom their last public issue. As companies grow, they are likely to make further trips to the capital market with issues of debt and equity. These issues are likely to be public issues offered to investors are large or rights or private placements or preferential allotment. The procedure for a public issue by a listed company seasoned offering is similar to that of an IPO. Hence all the steps involved in an IPO are applicable to a public issue by a listed company. However, a public issue by a listed company is subject of fewer regulations when compared to an IPO (expect when the post issue net worth grows to more that five times the pre-issue net worth). This is evident from the following: A public issue by a company which has been listed on a stock exchange for at least three years and has a track record of dividend payment for at least three immediate preceding years does require the promoters contribution, provided the relevant information is disclosed in the offer document.