CH 5: CAPITAL MARKETS – SEBI – PART 1

What is Capital Market

Capital market is a market for long term debt and equity shares. It helps to generate bulk fund for government and industries. The institutions in capital market are NBFCs. SEBI, insurance companies, venture capital funds, chit funds all come under NBFCs.

Capital markets are divided into primary and secondary markets

CAPITAL-MARKET-1-1024x768
CAPITAL MARKET

1) Primary Markets

Primary market is the part of capital market where issue of new securities takes place. Public sector institutions, companies and governments obtain funds for further growth of the company after the sale of their securities or bonds in primary market. The selling process of new issues in primary market is called as Underwriting and this process is done by a group of people called underwriters or security dealers. From a retail investor’s point of view, investing in the primary market is the first step towards trading in stocks and shares

Types of issues
Public issues can be classified into 3 types:

Initial Public Offering (IPO)
 – Fresh issue of shares or selling existing securities by an unlisted company for the first time is known as IPO. Listing and trading of securities of a company takes place in IPO.

Rights Issue
 – Rights issue is when the listed company issues new securities and provides special rights to its existing shareholders for buying the securities before issuing it to public. The rights are issued on particular ratio based on the number of securities currently held by the share holder.

Preferential Issue
 – It is the fresh issue of securities and shares by listed company. It is called as preferential as the shareholders with preferential shares get the preference when it comes to dividend disbursement.

2) Secondary Market

Secondary market is the market where securities are traded after being intially offered to the public in the primary market. Secondary market comprises of equity markets and debt markets. In secondary market, stock exchange is part of an auction market and OTC market is part of the dealer market.

There are 22 recognized stock exchanges in India of which, BSE & NSE are popular.

Financial Instruments dealt in Secondary Market 

Equity:  It is the ownership part in a company. Income is  not fixed. Last claim during liquidation of the company. 

Types: 

  1. Ordinary shares
  2. Rights issue
  3. Preferential shares with or without voting power.
  4. Venture capital fund (Seed Capital)
  5. Angel Investor – rich individuals helping startups.

Debentures: 

Debentures are bonds issued by a company bearing a fixed rate of interest. Debentures are normally secured.Debentures are the most common form of long-term loans that can be taken out by a corporation. These loans are repayable on a fixed date and pay a fixed rate of interest. A company normally makes these interest payments prior to paying out dividends to its shareholders

Bonds:

bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital. They are essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates. A bond security is generally issued by a company, muncipality or a government agency.

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