CAPITAL MARKET The market where investment instruments like bonds, equities and mortgages are traded is known as the capital market. The primal role of this market is to make investment from investors who have surplus funds to the ones who are running a deficit. It refers to the institutional arrangements for facilitating the borrowing and lending of long-term funds.

Types of capital market There are two types of capital market: Primary market, Secondary market

Primary Market It is that 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 for long term capital Securities are sold first time in this market It is also called new issue market(NIM) Securities are directly issued to investor It facilitates capital formation in the economy. Funds generated in this market are utilized for the purchase of fixed assets. It does not include long term loans from financial institutions. Securities are issued by companies for setting new business and for expanding or modernizing existing business. It is the process of going public i.e., converting private capital into public capital. It Has No Particular Place 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

Functions of New Issue Market Origination : the proposal is analyzed the nature of security, size, and timing of issue and floatation method. Underwriting Time of floating of an issue Type of issue- equity, preference ,debt etc., Price Distribution- sale of share-performed by the brokers

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. The chief purpose of the secondary market is to create liquidity in securities.

It is also known as “aftermarket”

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. .

Features of Secondary Market It Creates Liquidity It deals in previously issued securities It Comes After Primary Market It Has A Particular Place It Encourage New Investments It merely transfer existing securities between buyers and sellers Secondary market do not directly contribute to capital formation.

Purpose of stock market It helps in the capital formation of the country It maintains active trading It increases liquidity of assets. It also helps in price recovery process.

Functions of stock market Ensure liquidity of capital Continuous market for securities Evaluation of securities Mobilizing surplus savings Helpful in raising new capital Safety in dealings Listing of securities Platform for public debt Clearing house of business information

Major players in stock market Stock brokers Commission brokers Jobber/speculator Floor brokers –buy and sell to other brokers Taraniwalla or jobber Odd lot dealer Budliwalla – financier in the stock exchange. Arbitrageur –dealing in different stock exchanges Security dealer – purchase and sale of govt. securities by security dealer. Financial intermediaries Pooling funds from savers and provide the same to the borrowers Individual investors Individual investor make implicit forecast about these factors without elaborate reports because they have no need to communicate beyond the purchase or sale order to their brokers.

Trading in stock market Listed securities of public limited companies. Purpose-facilitates the exchange of securities between buyers and sellers. Procedures in dealing stock market: Selection of a broker –approach their banks Placing an order –broker guides about time to purchase and sell Marketing the contract- different post are there. Authorized clerk goes to concern post and express his intention to buy/sell. Contract note – buying and seller brokers prepare notes after their mutual consent next day. Settlement – the selling broker hands over the transfer form and share certificates to the buying broker after receiving the price.

Weakness of stock market Rampant speculation Insider trading Oligopolistic– highly dominated by big financial institutions and brokers Limited forward trading Outdated share trading system-an international prospectus is thoroughly outdated Lack of a single market – the limited inter-market operations have resulted in increased costs. Problem of interface between the primary and secondary markets –continue with same old infrastructure. Inadequacy of investor service – small ones have been unable to service their customers adequately.

Relationship b/w NIM & stock market Liquidity –nim cannot function without secondary market. Listing – rules & regulation to be followed Marketability –NIM-direct link between investor and company; Stock market- marketability & capital appreciation Complementary: health of the NIM depends on the secondary market and vice versa.

Difference between NIM and Stock market Issues Fresh issue -First time Deals existing securities location No fixed geographical location needed Needs fixed place to carry the trading Transfer of securities Transfer fro company to investors first time Transfer from one investor to other investor. Entry All companies can enter NIM and make fresh issue of securities To trade, listing is mandatory. Administration Has no tangible form of administrative set-up Has definite set up Regulation Outside company-SEBI, stock exchanges, companies Act Subject to both within and outside the stock exchange Aim Long term instruments for borrowings Provide liquidity Price Movement Stock price in secondary market influences pricing of new issue Micro-macro influence stock price movement Depth Depends on number & volume of issue Depends on NIM, -more corporate entities and more instruments to raise funds.