Sunday, February 16, 2014

Capital Market - Introduction

1. Securities Markets

Capital Markets are financial markets that facilitate buying or selling of equity-backed securities or long-term debt instruments. It is also known as Securities Market. It performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporate) is most efficiently achieved through the securities market. In other words, securities markets provide channels for reallocation of savings to investment and entrepreneurship. Savings are linked to investment by a variety of intermediaries, through a range of financial products, called "Securities". In capital market world, Securities and Instruments are used interchangeably. Securities Markets composed of two types of markets:

  • Primary Market: Where new stock and bond issues are sold to investors.
  • Secondary Market: Were trading happens on existing securities.

1.1 Primary Market

This segment of capital market deals with issuing of new securities. Companies, govt. or public sector industries raise their capital need through the Primary Market. The issuing company or group receives cash from investors which is then used to fund operations or expand business. This can be termed as initial sale. After initial sale is completed, further trading is said to conduct on the secondary market.

1.2 Secondary Market

This segment of capital market deals with the already issued securities such as stock, bond, option, future etc. Trading (buying and selling) between investors occurs in the secondary market. It is to be noted that in Primary Market trading happens between issuer and investor whereas in Secondary Market, already listed securities are traded among investors. Example of secondary markets are as follows:
  • NSE (India)
  • BSE (India)
  • NYSE (USA)
  • AMEX (USA)
  • ASX (Australia)
  • SEHK (Hong Kong)
  • SGX (Singapore) and etc.

2. Financial Securities (Instruments)

Financial Securities or Financial Instruments are tradeable asset of any kind. In Capital Market world, there exists various kinds of financial instruments - it can be either cash, evidence of ownership to the issuing company, a contractual right to receive/deliver cash or an underlying contract of any other financial instrument (s) etc. Based on the nature of securities those can be categorized or classed as follows:




2.1 Shares or Stocks:

This type of instrument represents a form of ownership to the issuing company. By this type of instruments, an issuing company liquidate ownership among the share-holders. This can be further classified as follows:
  • Equity Shares/Ordinary Shares
  • Rights Issue/Rights Shares
  • Bonus Shares
  • Preference Shares and etc.

2.2 Debt/ Bond/ Fixed Income

It is a negotiable certificate  evidencing indebtedness. A debt security is generally issued by govt. agency, municipality or a corporate. A bond investors lends money to the issue and in return the issuer promises to repay the loan amount on a specified maturity date. Usually issuer pays periodic interest to the bond holder (or investor). Depending on the nature of interest repayment this type of instrument can be further classified as follows:
  • Coupon Bond
  • Discount or Zero Coupon Bond
  • Convertible Bond
  • Treasury Bills

2.3 Derivatives

Derivatives is a product whose value is derived from the value of one or more base security (is) or in other terms underlying. An underlying can be equity, market index, foreign exchange (forex), commodity or any other assets. Initially derivatives are emerged as a purpose of hedging. Depending on the nature of business, there are several types of derivatives products and those are as follows:
  • Futures
  • Options (Calls/Puts)
  • Forwards
  • Warrants

© Sumit Bhowmick

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