Capital Markets.

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 brokerdealers 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 longerterm 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, dealerbased, 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.