CAPITAL MARKETS

PRESENTED BY:
TANUJ GUPTA
35-MBA-06
 FINANCIAL
MARKETS
These markets refers to the credit markets which
provides financial accommodation to individuals,
firms, institutions etc. These credit markets
provides both long term and short term financial
assistance to various interested parties. Hence,
these markets are of two types:

 CAPITAL MARKETS.
 MONEY MARKETS.
 COMMODITIES MARKETS
 DERIEVATIVES MARKETS
 INSURANCE MARKETS
 FOREIGN EXCHANGE MARKETS.
 CAPITAL MARKETS
•The capital market is the market for securities, where
companies and the government can raise long-term
funds. The capital market includes the stock market
and the bond market.

•Financial regulators, such as the U.S. Securities and

Exchange Commission and Securities and Exchange
Board of India(SEBI)-India , oversee the capital markets
in their designated countries to ensure that investors
are protected against fraud.

•The capital markets consist of the primary market,

where new issues are distributed to investors, and the
secondary market, where existing securities are
traded.
 BOND MARKETS
The bond market (also known as the debt,
credit, or fixed income market) is a
financial market where participants buy and
sell debt securities, usually in the form of
bonds.
The size of the international bond market is
an estimated $45 trillion, of which the size of
the outstanding U.S. bond market debt was
$25.2 trillion.
Nearly all of the $923 billion average daily
trading volume (as of early 2007) in the U.S.
Bond Market takes place between broker-
dealers and large institutions
TYPES OF BOND
MARKETS
It is classified into five specific bond markets
Corporate
Government & Agency
Municipal
Mortgage Backed, Asset Backed, and
Collateralized Debt Obligation
Funding
BOND MARKET
PARTICIPANTS
Participants include:
Institutional investors;
Governments;
Traders; and
Individuals
BOND MARKET
VOLATILITY
For market participants who own a bond, collect the
coupon and hold it to maturity, market volatility is
irrelevant; principal and interest are received
according to a pre-determined schedule.
Participants who buy and sell bonds before maturity
are exposed to many risks, most importantly changes
in interest rates. When interest rates increase, the
value of existing bonds fall, since new issues pay a
higher yield. Likewise, when interest rates decrease,
the value of existing bonds rise, since new issues pay a
lower yield. This is the fundamental concept of bond
market volatility: changes in bond prices are inverse to
changes in interest rates. Fluctuating interest rates are
part of a country's monetary policy and bond market
volatility is a response to expected monetary policy
and economic changes.
1.) FIXED INCOME BOND
Fixed income refers to any type of investment
that yields a regular (or fixed) return.
For example, if you borrow money and have to
pay interest once a month, you have issued a
fixed-income security. When a company does this,
it is often called a bond or corporate bank debt
(although 'preferred stock' is also sometimes
considered to be fixed income). Sometimes
people misspeak when they talk about fixed
income, bonds actually have higher risk, while
notes and bills have less risk because these are
issued by Government agencies.
 Important terminology used by the
fixed- income industry:
The principal of a bond is the amount that is
being lent.
The coupon is the interest that will be paid.
The maturity is the end of the bond, the
date that the amount must be returned.
The issuer is the entity (company or govt.)
who is borrowing the money (issuing the
bond) and paying the interest (the coupon).
The issue is another term for the bond itself.
The indenture is the contract that states all
of the terms of the bond.
2.) CORPORATE BOND
A corporate bond is a bond issued by a
corporation. The term is usually applied to longer-
term debt instruments, generally with a maturity
date falling at least a year after their issue date.
(The term "commercial paper" is sometimes used
for instruments with a shorter maturity.)
Corporate bonds are often listed on major
exchanges (bonds there are called "listed" bonds)
and the coupon (i.e. interest payment) is usually
taxable. Sometimes this coupon can be zero with
a high redemption value. However, despite being
listed on exchanges, the vast majority of trading
volume in corporate bonds in most developed
markets takes place in decentralized, dealer-
based, over-the-counter markets.
3.) GOVERNMENT BONDS
A government bond is a bond issued by a
national government denominated in the
country's own currency. Bonds issued by
national governments in foreign currencies
are normally referred to as sovereign bonds.
RISK
Government bonds are usually referred to as
risk-free bonds, because the government can
raise taxes or simply print more money to
redeem the bond at maturity.
 ISSUANCE
Government bonds are issued through
agencies that are part of the government's
treasury department, for example
Bunds are bonds issued by the German
Finance Agency, denominated in Euros
Gilts are bonds issued by the UK Debt
Management Office and are denominated in
sterling
US Treasuries are issued by the Bureau of the
Public Debt
4.) MUNICIPAL BONDS
a municipal bond (or muni) is a bond issued
by a state, city or other local government, or
their agencies. Potential issuers of municipal
bonds include cities, counties, redevelopment
agencies, school districts, publicly owned
airports and seaports, and any other
governmental entity (or group of
governments)
 ISSUERS
Municipal bonds are issued by states, cities, and
counties, or their agencies (the municipal
issuer) to raise funds. The methods and practices
of issuing debt are governed by an extensive
system of laws and regulations, which vary by
state. Bonds bear interest at either a fixed or
variable rate of interest.
The issuer of a municipal bond receives a cash
payment at the time of issuance in exchange for a
promise to repay the investors who provide the
cash payment (the bond holder) over time.
Repayment periods can be as short as a few
months (although this is rare) to 20, 30, or 40
years, or even longer.
 Municipal bond holders
Municipal bond holders may purchase bonds
either directly from the issuer at the time of
issuance (on the primary market), or from
other bond holders at some time after
issuance (on the secondary market). In
exchange for an upfront investment of capital,
the bond holder receives payments over time
composed of interest on the invested
principal, and a return of the invested
principal itself .
5.) HIGH YIELD DEPT
BONDS
In finance, a high yield bond (non-investment
grade bond, speculative grade bond or junk
bond) is a bond that is rated below investment grade
at the time of purchase. These bonds have a higher
risk of default or other adverse credit events, but
typically pay higher yields than better quality bonds in
order to make them attractive to investors.
Global issuance of high yield bonds more than doubled
in 2003 to nearly $146 billion in securities issued from
less than $63 billion in 2002, although this is still less
than the record of $150 billion in 1998. Issuance is
disproportionately centered in the U.S.A., although
issuers in Europe, Asia and South Africa have recently
turned to high yield debt in connection with
refinancing and acquisitions. In 2006, European
companies issued over €31 billion of high yield bonds
STOCK
MARKETS.
 STOCK MARKETS
A stock market is a private or public market for
the trading of company stock and derivatives of
company stock at an agreed price; both of these
are securities listed on a stock exchange as well
as those only traded privately.
The size of the 'stock market' is estimated
at about $51 trillion.
The expression 'stock market' refers to the
system that enables the trading of company
stocks (collective shares), other securities, and
derivatives. Bonds are still traditionally traded in
an informal, over-the-counter market known as
the bond market.
Market participants
Many years ago, worldwide, buyers and
sellers were individual investors, such as
wealthy businessmen, with long family
histories (and emotional ties) to particular
corporations.
Over time, markets have become more
"institutionalized"; buyers and sellers are
largely institutions
The rise of the institutional investor has
brought with it some improvements in market
operations.
Function and purpose
 The stock market is one of the most important sources for
companies to raise money. This allows businesses to go
public, or raise additional capital for expansion. The liquidity
that an exchange provides affords investors the ability to
quickly and easily sell securities. This is an attractive
feature of investing in stocks, compared to other less liquid
investments such as real estate.
 History has shown that the price of shares and other assets
is an important part of the dynamics of economic activity,
and can influence or be an indicator of social mood. Rising
share prices, for instance, tend to be associated with
increased business investment and vice versa. Share prices
also affect the wealth of households and their consumption.
Therefore, central banks tend to keep an eye on the control
and behavior of the stock market and, in general, on the
smooth operation of financial system functions. Financial
stability is the raison d'être of central banks
Exchanges also act as the clearinghouse for
each transaction, meaning that they collect
and deliver the shares, and guarantee
payment to the seller of a security. This
eliminates the risk to an individual buyer or
seller that the counterparty could default on
the transaction.
The smooth functioning of all these activities
facilitates economic growth in that lower costs
and enterprise risks promote the production of
goods and services as well as employment. In
this way the financial system contributes to
increased prosperity.
The behavior of the stock
market
Investors may temporarily pull financial prices away
from their long term trend level. Over-reactions may
occur— so that excessive optimism (euphoria) may
drive prices unduly high or excessive pessimism may
drive prices unduly low. New theoretical and empirical
arguments have been put forward against the notion
that financial markets are efficient.
Stock market index
The movements of the prices in a market or section of
a market are captured in price indices called stock
market indices, of which there are many, e.g. BSE
SENSEXindices. Such indices are usually market
capitalization (the total market value of floating capital
of the company) weighted, with the weights reflecting
the contribution of the stock to the index. The
constituents of the index are reviewed frequently to
include/exclude stocks in order to reflect the changing
1.) COMMON STOCK
A share (also referred to as equity shares) of stock
represents a share of ownership in a corporation.
Types of stock
Stock typically takes the form of shares of common
stock. As a unit of ownership, common stock typically
carries voting rights that can be exercised in corporate
decisions. Preferred stock differs from common stock
in that it typically does not carry voting rights but is
legally entitled to receive a certain level of dividend
payments before any dividends can be issued to other
shareholders. Convertible preferred stock is preferred
stock that includes an option for the holder to convert
the preferred shares into a fixed number of common
shares, usually anytime after a predetermined date.
Shares of such stock are called "convertible preferred
shares" (or "convertible preference shares" in the
United Kingdom).
Trading
A stock exchange is an organization that
provides a marketplace for either physical or
virtual trading shares, bonds and warrants
and other financial products where investors
(represented by stock brokers) may buy and
sell shares of a wide range of companies. A
company will usually list its shares by meeting
and maintaining the listing requirements of a
particular stock exchange and the different. In
the United States, through the inter-market
quotation system, stocks listed on one
exchange can also be bought or sold on
several other exchanges.
Stock price fluctuations
The price of a stock fluctuates fundamentally due
to the theory of supply and demand. Like all
commodities in the market, the price of a stock is
directly proportional to the demand. However,
there are many factors on the basis of which the
demand for a particular stock may increase or
decrease. These factors are studied using
methods of fundamental analysis and technical
analysis to predict the changes in the stock price.
A recent study shows that customer satisfaction,
as measured by the American Customer
Satisfaction Index (ACSI), is significantly
correlated to the stock market value. Stock price
is also changed based on the forecast for the
company and whether their profits are expected
2.) PREFERRED STOCK
Preferred stock, also called preferred shares
or preference shares, is typically a higher
ranking stock than common stock, and its terms
are negotiated between the corporation and the
investor.
Preferred stock may carry superior voting rights to
common stock or may not carry any voting rights
at all. Preferred stock may carry a dividend that is
paid out prior to any dividends to common stock
holders. Preferred stock may have a convertibility
feature into common stock.
Preferred stock holders will be paid out in assets
before common stockholders and after debt
holders in bankruptcy.
3.) STOCK EXCHANGE
A stock exchange, share market or
bourse is a corporation or mutual
organization which provides facilities for stock
brokers and traders, to trade company stocks
and other securities. Stock exchanges also
provide facilities for the issue and redemption
of securities as well as other financial
instruments and capital events including the
payment of income and dividends. The
securities traded on a stock exchange include:
shares issued by companies, unit trusts and
other pooled investment products and bonds.
To be able to trade a security on a certain
A stock exchange is often the most important
component of a stock market. Supply and demand in
stock markets is driven by various factors which, as in
all free markets, affect the price of stocks.
The role of stock exchanges
Raising capital for businesses
Mobilizing savings for investment
Facilitating company growth
Redistribution of wealth
Corporate governance
Creating investment opportunities for small investors
Government capital-raising for development projects
Barometer of the economy.
PRIMARY MARKETS
The primary is that part of the capital
markets that deals with the issuance of new
securities. Companies, governments or public
sector institutions can obtain funding through
the sale of a new stock or bond issue. This is
typically done through a syndicate of
securities dealers. The process of selling new
issues to investors is called underwriting. In
the case of a new stock issue, this sale is an
initial public offering (IPO). Dealers earn a
commission that is built into the price of the
security offering, though it can be found in the
prospectus.
 Methods of issuing securities in the Primary
Market
1. Initial Public Offer;
2. Rights Issue (For existing Companies); and
3. Preferential Issue.
SECONDRY MARKETS
The secondary market is the financial
market for trading of securities that have
already been issued in an initial private or
public offering. Alternatively, secondary
market can refer to the market for any kind of
used goods. The market that exists in a new
security just after the new issue, is often
referred to as the aftermarket. Once a newly
issued stock is listed on a stock exchange,
investors and speculators can easily trade on
the exchange, as market makers provide bids
and offers in the new stock.
Function
In the secondary market, securities are sold
by and transferred from one investor or
speculator to another. It is therefore important
that the secondary market be highly liquid
Secondary marketing is vital to an efficient
and modern capital market. Fundamentally,
secondary markets mesh the investor's
preference for liquidity with the capital user's
preference to be able to use the capital for an
extended period of time.