Capital Market

CAPITAL MARKET

Capital markets are venues where savings and investments are channelled between the suppliers who have capital and those who are in need of capital. The entities who have capital include retail and institutional investors while those who seek capital are businesses, governments, and people.
Capital markets are composed of primary and secondary markets. The most common capital markets are the stock market and the bond market. Capital markets seek to improve transactional efficiencies. These markets bring those who hold capital and those seeking capital together and provide a place where entities can exchange securities.

  1. Mobilization of savings to finance long term investments
  2. Facilitates trading of securities
  3. Minimization of transaction and information cost
  4. Encourage wide range of ownership of productive assets
  5. Quick valuation of financial instruments like shares and debentures
  6. Facilitates transaction settlement, as per the definite time schedules
  7. Offering insurance against market or price risk, through derivative trading
  8. Improvement in the effectiveness of capital allocation, with the help of competitive price mechanism
Capital market is a measure of inherent strength of the economy. It is one of the best source of finance, for the companies, and offers a spectrum of investment avenues to the investors, which in turn encourages capital creation in the economy.

Types of Capital Market

The capital market is bifurcated in two segments, primary market and secondary market:

  1. Primary Market
    Otherwise called as New Issues Market, it is the market for the trading of new securities, for the first time. It embraces both initial public offering and further public offering. In the primary market, the mobilisation of funds takes place through prospectus, right issue and private placement of securities.
  2. Secondary Market:
    Secondary Market can be described as the market for old securities, in the sense that securities which are previously issued in the primary market are traded here. The trading takes place between investors, that follows the original issue in the primary market. It covers both stock exchange and over-the counter market.
Capital market improves the quality of information available to the investor regarding the investment. Add to that, it plays a crucial role in encouraging the adoption of rules of corporate governance, which backs the trading environment. It includes all the processes that help in the transfer of already existing securities.

Importance

  1. It is only with the help of capital market; long-term funds are raised by the business community.
  2. It provides opportunity for the public to investtheir savings in attractive securities which provide a higher return.
  3. A well-developed capital market is capable of attracting funds even from foreign country. Thus, foreign capital flows into the country through foreign investments.
  4. Capital market provides an opportunity for the investing public to know the trend of different securities and the conditions prevailing in the economy.
  5. It enables the country to achieve economic growth as capital formation is promoted through the capital market.
  6. Existing companies, because of their performance will be able to expand their industries and also go in for diversification of business due to the capital market.
  7. Capital market is the barometer of the economy by which you are able to study the economic conditions of the country and it enables the government to take suitable action.
  8. Through the Press and different media, the public are informed about the prices of different securities. This enables the public to take necessary investment decisions.
  9. Capital market provides opportunities for different institutions such as commercial banks, mutual funds, investment trust; etc., to earn a good return on the investing funds. They employ financial experts who are able to predict the changes in the market and accordingly undertake suitable portfolio investments.

Broad Constituents in the Indian Capital Markets
  • Fund Raisers
    Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following sources help companies raise funds.
  • Fund Providers
    Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub-accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc.
  • Intermediaries
    Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub-accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc.
  • Organizations
    Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock exchanges, and the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).
  • Market Regulators
    Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).
Capital Market Instruments:
  • Mortgages
  • Corporation bonds
  • State and local government bonds
  • Federally sponsored credit agency securities
  • Finance company bonds
  • Commercial banks bonds and commercial paper
  • Corporate stock

FAQ's

Accounting rate of return is also known as Average rate of return which gives the financial ratio used in capital budgeting. The ratio takes time value of money factor which calculates the return and the net income can be generated from the proposed capital investment. It is used to show the percentage return. The formula of computation is:
ARR= Average profit/average investment

Steps which are taken to control the capital budgeting process are as follows
1. Identify the proposals which are already involved in capital budgeting.
2. Do the screening of the proposal for future estimation.
3. Evaluate the different type of proposals.
4. Fix the priorities of the proposals.
5. Final approval and planning of the capital expenditure.
6. Implement the proposal.
7. Review the proposal.

Calculation of the present value: - in this the worth of the future sum is given and the specified rate of return is been shown. It has lots of variations in this is that the future cash flow is discounted at the discount rate and it also represents the low present value of future cash flow.

The acceptance rule is the rule which is used for the communication purpose and it is used in unilateral contracts which makes an offer and will be accepted by some act. This rule also determines whether the agreement is from both sides or not. The offer may only be accepted if the offeror is the person for whom the offer is made. If the offer is accepted then the offer can be accepted without any modification

Underwriting is a process in which there are those financial service providers such as bank, investments and insurers which uses these to find out the eligibility of a customer to receive the products which is owned by them such as equity capital, insurance and credit. In this process there are risks which are involved and mostly financial provider participates in those kinds of risks and remain prepared to tackle them.

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