Markets where financial securities like stocks and bonds are bought and sold to raise capital.

Why do we need capital markets? Price discovery - Price is decided by demand and supply through the interactions between buyers and sellers. Operational efficiency Markets provide operational efficiency through: trading convenience Adequate liquidity - large number of participants low cost of trading Allocation of Resources Market types Primary market where security gets birth (IPO) original issue of stocks, bonds and other financial assets Secondary market where existing securities are traded either on official stock exchanges OTC market Equity i.e. stocks & shares, are financial instruments representing ownership interest in a corporation. Issued to raise long term (perpetual) capital by selling ownership stake in corporation.

Types of shares Ordinary Preferential Rights Depository Receipts

Sold by the corporation to the public via Initial Public Offer (IPO) in primary market Often listed on stock exchanges to facilitate secondary market trading among investing public Share in the profit of the company Dividends - payments declared quarterly, six months, yearly. Dividends are not fixed. Depends on performance of the company. Voting rights at AGMs To Elect/remove Company Board of Directors

Voting on resolutions at company meeting (AGM, Special Meetings) Liquidation Equity shareholder gets the money last in liquidation of a company Preferred Shares Purpose: Ownership at reduced risk, in exchange for reduced upside

Lifecycle: Like common stock but normally no voting rights

Characteristics Right to fixed dividends Priority over Common Stockholders Equity shareholders can not be paid dividend unless Preference shareholders are paid

ADR (AMERICAN DEPOSITORY RECEIPTS) Purpose Indirect way of buying shares of companies listed on American exchanges

Lifecycle A custodian creates a pool of shares of original stock from the home market The custodian issues receipts representing proportional shares of this pool. These receipts represent indirect ownership. The receipts are listed on US exchanges for secondary market trading NYSE (New York Stock Exchange) Dow Jones Industrials (since 1894) Standard and Poors 500

NASDAQ Nasdaq Composite Tokyo Stock Exchange: Nikkei 225 Hong Kong Stock Exchange: Hang Seng Frankfurt Stock Exchange: DAX London Stock Exchange: FTSE100 Paris Stock Exchange: CAC40 National Stock Exchange / BSE: Nifty / Sensex

What is a bond ? If Equity represents Ownership, Bond is a Loan. It is a loan given by investors to companies, banks, corporations and governments. Bonds are debt obligations with long-term maturities. BondsTerminology Face Value (Par Value) Issuance Price Coupon Interest calculated on Face Value (Par Value) Coupon Frequency Maturity Yield to Maturity (Internal Rate of Return - IRR) Fixed Rate bond - the amount of each coupon is fixed at issue and remains same throughout the life of the bond Floating rate bond - coupon adjusted at reset periods, linked to a benchmark rate, e.g. LIBOR, PRIME. As the benchmark fluctuates the bond coupon fluctuates. In a rising interest rate scenario it is better to stay invested in floating rate bond. Zero-coupon bonds - issued at a discount with a fixed final maturity value. Hence entire return is received as capital gain at maturity

Fixed Income examples Corporate Bonds US Treasury Bills, Notes and Bonds Municipal Bonds

Commercial Paper What are the money markets ? Markets short term debt instruments with original maturity of one year or less Generally issued on Discount basis. Zero-Coupon Usually High Rating securities with little or no risk of default Money markets instruments Treasury Bills (T-Bills) issued and guaranteed by the Government Sold on a discount basis

Commercial paper a promissory note sold by corporations issued on a discount basis

Bond Price Price of a bond depends on Maturity period of the bond Current prevailing interest rate inverse relation Rating of the bond What is foreign exchange ? In a foreign exchange transaction one currency is exchanged for another currency. i.e. Buying of one currency by paying for it in another currency FX market characteristics Over-The-Counter Market 24 hours market No physical location for the market or a formal exchange Network of banks, corporations, individuals, forex traders and brokers

What is a derivative ? Derivatives are instrument that derives its value at least in part from some other underlying instrument/asset. For eg. - The underlying for IBM option is IBM share trading in cash market. Derivatives covered Futures Options Swaps

What is an options contract ? Agreement which gives the right, but not the obligation to buy or sell a specified product at a specified price (strike price/exercise price) within a specified time period for a premium agreed when the option contract is traded An option contract is like buying insurance against a certain event happening

What is a swap ? A generic swap is an agreement between two parties to periodically exchange payments (cash flows) on two assets What does a custodian do Clients Asset Safekeeping Ensure trade settlement For buy deal ensures that funds are transferred to clearing house For sale ensures that security is transferred to clearing house

Handle all administrative issues that arise with regard to assets in their safekeeping corporate actions announcements dividends, bonus, split, proxy voting etc Securities lending etc.

Interacts with clearing house, registry, asset manager and broker