Capital-Market ppt2

CAPITAL
MARKET
CAPITAL MARKET
The market where investment
instruments like bonds, equities and
mortgages are traded is known as the
capital market.
The primary role of this market is to
make investment from investors who
have surplus funds to the ones who
are running a deficit.
 The capital market
offers both long term and
overnight funds.
The different types of financial
instruments that are traded in the
capital markets are:
> equity instruments
> credit market instruments,
> insurance instruments,
> foreign exchange instruments,
> hybrid instruments and
> derivative instruments.
Nature of capital market
The nature of capital market is brought out by the
following facts:
It Has Two Segments
It Deals in Long-Term Securities
It Performs Trade-off Function
It Creates Dispersion In Business Ownership
It Helps in Capital Formation
It Helps in Creating Liquidity

Types of capital market
There are two types of capital
market:
Primary market
Secondary market
Primary Market
 It is the market in which
shares, debentures and other
securities are sold for the first
time for collecting long-term
capital.
This market is concerned with
new issues. Therefore, the
primary market is also called
NEW ISSUE MARKET.
In this market, the flow of funds is from
savers to borrowers (industries), hence,
it helps directly in the capital formation
of the country.
The money collected from this market
is generally used by the companies to
modernize the plant, machinery and
buildings, for extending business, and
for setting up new business unit.
Features of Primary Market
It Is Related With New
Issues
It Has No Particular
Place
Features of Primary Market
It Has Various Methods Of Float Capital:
Following are the methods of raising capital
in the primary market:
i) Public Issue
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
v) Electronic-Initial Public Offer
It comes before Secondary Market
Secondary Market
 The secondary market is that
market in which the buying and
selling of the previously issued
securities is done.
The transactions of the
secondary market are generally
done through the medium of
stock exchange.
Secondary Market
The chief purpose of
the secondary market is
to create liquidity in
securities.
 If an individual has bought some
security. and he now wants to sell it,
he can do so through the medium of
stock exchange to sell or purchase
through the medium of stock
exchange requires the services of
the broker presently, their are 24
stock exchange
Features of Secondary
Market
It Creates Liquidity
It Comes After Primary Market
It Has A Particular Place
It Encourage New Investments
CAPITAL MARKET
RISK
 Investment in long term financial
instruments is accompanied by high
capital market risks. Since there are
two types of capital markets- the
stock market and the bond market.
So risks are present in both the
market.
Risk in the Stock Market
 Stock prices keep fluctuating over
a wide range unlike the bank
deposits or government bonds.
The efficient market hypothesis
shows the effect of fundamental
factors in changing the price of the
stock market.
The Efficient Market Hypothesis
shows that all price movements are
random whereas there are plenty of
studies that reflect the fact that there is
a specific trend in the stock market
prices over a period of time.
Research has shown that there are
certain psychological factors that
shape the stock market prices.
 Sometimes the market
behaves illogically to any
economic news.
The stock market prices can
be diverted in any direction in
response to press releases,
rumors and mass panic.
The stock market prices are
also subject to speculation. In
the short run the stock
market prices may be very
volatile due to the
occurrences of the fast
market changing events.
Risk in the Bond Market
Capital market risk in the bond
market arises due to interest rate
changes. There is an inverse
relationship existing between the
interest rate and the price of the bond.
Hence the bond prices are sensitive to
the monetary policy of the country as
well as economic changes.
CAPITAL MARKET
INVESTMENT
 Capital market investment takes
place through the bond market and
the stock market.
The bond market is often referred to as the debt
market, fixed-income market, or credit market. It
is the collective name given to all trades and issues
of debt securities. Governments issue bonds to raise
capital to pay debts or fund infrastructural
improvements.
Stock markets are venues where buyers and
sellers meet to exchange equity shares of public
corporations. Stock markets are components of
a free-market economy because they enable
democratized access to investor trading and
exchange of capital. Stock markets create
efficient price discovery and efficient dealing.
The capital market is basically the
financial pool in which different
companies as well as the government
can raise long term funds.
Capital market investment that takes
place through the bond and the stock
market may be elucidated in the
following heads.
Capital market
investments in the stock
market
The stock market is basically the
trading ground capital market
investment in the following:
i) Company’s stocks
ii) Derivatives
iii) Other securities
The capital market
investments in the stock
market take place by:
1) Small individual stock
investors
2) Large hedge fund
traders.
The capital market
investments can occur
either in:
1) The physical
market by a method
known as the open
outcry. ( Open outcry is similar to an auction where all participants have
a chance to compete for orders. It leads to transparency, efficient markets, and fair price .
2) Trading can also occur in
the virtual exchange where trading is
done in the computer network.
 The investors in the stock market
have the liberty to buy or sell the
stock that they are holding at their
own discretion unlike the case
of government securities, bonds or
real estate.
The stock exchanges
basically function as
the clearing house for
such liquid
transactions.
Capital Market
Investments in the Bond
Market
 The bond market is a financial
market where the participants buy
and sell debt securities.
The bond market is also differently
known as the debt, credit or fixed
income market.
There are different types of
bond markets based on the
different types of bonds that
are traded:
Corporate,
Government and agency,
Municipal,
Bonds backed by mortgages
& assets,
 The bonds, except for the
corporate bonds do not have
formal exchanges but are
traded over-the- counter.
Individual investors are
attracted to the bond market and
make investments through
the bond funds, closed-end-funds
or the unit investment trusts.
Another way of investing directly
in the bond issue is the Exchange-
traded-funds.
The capital market investment in
the bond market is done by:
Institutional investors
Governments, traders and
Individuals.

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CAPITAL

It Deals in Long-Term Securities

It Performs Trade-off Function

It Creates Dispersion In Business Ownership

It Helps in Capital Formation

It Helps in Creating Liquidity

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