CAPITAL MARKET –OVERVIEW

HISTORY OF CAPITAL MARKET

PRESENT SCENARIO OF CAPITAL MARKET
ROLEOF CAPITAL MARKET
FUNCTION OF CAPITAL MARKET
INDIAN CAPITAL MARKET &DEVELOPEMENT
FEATURE AFFACTED TO CAPITAL MARKET
TYPE OF CAPITAL MARKET
PRIMARY MARKET
SECONDARY MARKET

CAPITAL MARKET INSTRUMENT

INSTITUTIONAL SOURCES OF CAPITAL MARKET
CAPITAL MARKET REFORMS BY SEBI

CAPITAL MARKET
A Capital market is a financial market in which long-
term debt (over a year) or equity-backed securities are bought and
sold.[6] Capital markets channel the wealth of savers to those who
can put it to long-term productive use, such as companies or
governments making long-term investments.[a] Financial
regulators like Securities and Exchange Board of
India (SEBI), Bank of England (BoE) and the U.S. Securities and
Exchange Commission (SEC) oversee capital markets to protect
investors against fraud, among other duties.
Modern capital markets are almost invariably hosted on computer-
based electronic trading platforms; most can be accessed only by
entities within the financial sector or the treasury departments of
governments and corporations, but some can be accessed directly by
the public. As an example, in the United States, any American
citizen with an internet connection can create an account
with TreasuryDirect and use it to buy bonds in the primary market,
though sales to individuals form only a tiny fraction of the total
volume of bonds sold. Various private companies provide browser-
based platforms that allow individuals to buy shares and sometimes
even bonds in the secondary markets. There are many thousands of
such systems, most serving only small parts of the overall capital
markets. Entities hosting the systems include stock exchanges,
investment banks, and government departments. Physically, the
systems are hosted all over the world, though they tend to be
concentrated in financial centres like London, New York, and Hong
Kong.

MEANING AND FEATURES OF CAPITAL MARKET

The capital market is a market which deals in long-term loans. It
supplies industry with fixed and working capital and finances
medium-term and long-term borrowings of the central, state and
local governments. The capital market deals in ordinary stock are
shares and debentures of corporations, and bonds and securities of
governments.

The funds which flow into the capital market come from individuals
who have savings to invest, the merchant banks, the commercial
banks and non-bank financial intermediaries, such as insurance
companies, finance houses, unit trusts, investment trusts, venture
capital, leasing finance, mutual funds, building societies, etc.
Further, there are the issuing houses which do not provide capital
but underwrite the shares and debentures of companies and help in
selling their new issues of shares and debentures. The demand for
funds comes from joint stock companies for working and fixed
capital assets and inventories and from local, state and central
governments, improvement trusts, port trusts, etc. to finance a
variety of expenditures and assets.
The capital market functions through the stock exchange market. A
stock exchange is a market which facilitates buying and selling of
shares, stocks, bonds, securities and debentures. It is not only a
market for old securities and shares but also for new issues shares
and securities. In fact, the capital market is related to the supply
and demand for new capital, and the stock exchange facilitates such
transactions.

Thus the capital market comprises the complex of institutions and

mechanisms through which medium-term funds and long-term
funds are pooled and made available to individuals, business and
governments. It also encompasses the process by which securities
already outstanding are transferred.
Importance or Functions of Capital Market:
The capital market plays an important role immobilising saving and
channel is in them into productive investments for the development
of commerce and industry. As such, the capital market helps in
capital formation and economic growth of the country. We discuss
below the importance of capital market.
The capital market acts as an important link between savers and
investors. The savers are lenders of funds while investors are
borrowers of funds. The savers who do not spend all their income
are called. “Surplus units” and the borrowers are known as “deficit
units”. The capital market is the transmission mechanism between
surplus units and deficit units. It is a conduit through which surplus
units lend their surplus funds to deficit units.
Funds flow into the capital market from individuals and financial
intermediaries which are absorbed by commerce, industry and
government. It thus facilitates the movement of stream of capital to
be used more productively and profitability to increases the national
income.

The capital market prides incentives to savers in the form of interest

or dividend and transfers funds to investors. Thus it leads to capital
formation. In fact, the capital market provides a market mechanism
for those who have savings and to those who need funds for
productive investments. It diverts resources from wasteful and
unproductive channels such as gold, jewellery, real estate,
conspicuous consumption, etc. to productive investments.
A well-developed capital market comprising expert banking and
non-banking intermediaries brings stability in the value of stocks
and securities. It does so by providing capital to the needy at
reasonable interest rates and helps in minimising speculative
activities.
The capital market encourages economic growth. The various
institutions which operate in the capital market give quantities and
qualitative direction to the flow of funds and bring rational
allocation of resources. They do so by converting financial assets
into productive physical assets. This leads to the development of
commerce and industry through the private and public sector,
thereby inducing economic growth.

In an underdeveloped country where capital is scarce, the absence of

a developed capital market is a greater hindrance to capital
formation and economic growth. Even though the people are poor,
yet they do not have any inducements to save. Others who save, they
invest their savings in wasteful and unproductive channels, such as
gold, jewellery, real estate, conspicuous consumption, etc.
Such countries can induce people to save more by establishing
banking and non-banking financial institutions for the existence of a
developed capital market. Such a market can go a long way in
providing a link between savers and investors, thereby leading to
capital formation and economic growth.
http://www.yourarticlelibrary.com/banking/capital-market-meaning-features-and-importance-of-
capital-market/11128

A capital market can be either a primary market or a secondary market.

In primary market, new stock or bond issues are sold to investors, often
via a mechanism known as underwriting. The main entities seeking to
raise long-term funds on the primary capital markets are governments
(which may be municipal, local or national) and business enterprises
(companies). Governments issue only bonds, whereas companies often
issue both equity and bonds. The main entities purchasing the bonds or
stock include pension funds, hedge funds, sovereign wealth funds, and
less commonly wealthy individuals and investment banks trading on
their own behalf. In the secondary market, existing securities are sold
and bought among investors or traders, usually on an exchange, over-
the-counter, or elsewhere. The existence of secondary markets increases
the willingness of investors in primary markets, as they know they are
likely to be able to swiftly cash out their investments if the need arises.[7]
A second important division falls between the stock markets (for equity
securities, also known as shares, where investors acquire ownership of
companies) and the bond markets (where investors become creditors).[7]
The capital market is the market for securities, where Companies and
governments can raise long-term funds. It is a market in which money is
lent for periods longer than a year. A nation's capital market includes
such financial institutions as banks, insurance companies, and stock
exchanges that channel long-term investment funds to commercial and
industrial borrowers. Unlike the money market, on which lending is
ordinarily short term, the capital market typically finances fixed
investments like those in buildings and machinery.

CAPITAL MARKET VERSU MONEY MARKET

The money markets are used for the raising of short-term finance,
sometimes for loans that are expected to be paid back as early as
overnight. In contrast, the "capital markets" are used for the raising of
long-term finance, such as the purchase of shares/equities, or for loans
that are not expected to be fully paid back for at least a year.[6]
Funds borrowed from money markets are typically used for general
operating expenses, to provide liquid assets for brief periods. For
example, a company may have inbound payments from customers that
have not yet cleared, but need immediate cash to pay its employees.
When a company borrows from the primary capital markets, often the
purpose is to invest in additional physical capital goods, which will be
used to help increase its income. It can take many months or years
before the investment generates sufficient return to pay back its cost, and
hence the finance is long term.[7]
Together, money markets and capital markets form the financial
markets, as the term is narrowly understood.[b] The capital market is
concerned with long-term finance. In the widest sense, it consists of a
series of channels through which the savings of the community are made
available for industrial and commercial enterprises and public
authorities.
CAPITAL MARKET VERSUS BANK LOAN
Regular bank lending is not usually classed as a capital market
transaction, even when loans are extended for a period longer than a
year. First, regular bank loans are not securitized (i.e. they do not take
the form of a resaleable security like a share or bond that can be traded
on the markets). Second, lending from banks is more heavily regulated
than capital market lending. Third, bank depositors tend to be more risk-
averse than capital market investors. These three differences all act to
limit institutional lending as a source of finance. Two additional
differences, this time favoring lending by banks, are that banks are more
accessible for small and medium-sized companies, and that they have
the ability to create money as they lend. In the 20th century, most
company finance apart from share issues was raised by bank loans. But
since about 1980 there has been an ongoing trend for disintermediation,
where large and creditworthy companies have found they effectively
have to pay out less interest if they borrow directly from capital markets
rather than from banks. The tendency for companies to borrow from
capital markets instead of banks has been especially strong in the United
States. According to the Financial Times, capital markets overtook bank
lending as the leading source of long-term finance in 2009, which
reflects the risk aversion and bank regulation in the wake of the 2008
financial crisis.[8]
Compared to in the United States, companies in the European
Union have a greater reliance on bank lending for funding. Efforts to
enable companies to raise more funding through capital markets are
being coordinated through the EU's Capital Markets Union initiative

Nature and Constituents: The capital market consists of number of

individuals and institutions (including the government) that canalize the
supply and demand for longterm capital and claims on capital. The stock
exchange, commercial banks, co-operative banks, saving banks,
development banks, insurance companies, investment trust or
companies, etc., are important constituents of the capital markets. The
capital market has three important Components, namely the suppliers of
loanable funds, the borrowers and the Intermediaries who deal with the
leaders on the one hand and the Borrowers on the other.

Indian Financial Market consists of the following markets:

• Capital Market/ Securities Market
o Primary capital market
o Secondary capital market
• Debt Market

Primary Market
The most important type of capital market is the primary market. It is
what we call the new issue market. It exclusively deals with the issue of
new securities, i.e. securities that are issued to investors for the very first
time.
The main function of the primary market is capital formation for the
likes of companies, governments, institutions etc. It helps investors
invest their savings and extra funds in companies starting
new projects or enterprises looking to expand their companies.
The companies raise money in the primary market through securities
such as shares, debentures, loans and deposits, preference shares etc. Let
us take a look the various methods of how new securities are floated in
the primary market.

Methods of Raising Funds

1] Offer through Prospectus
This is a method of public issue. It is also the most used method in the
primary market to raise funds. Here the company invites the investors
(general members of the public) to invest in their company via an
advertisement also known as a prospectus.
After a prospectus is issued, the public subscribes to shares, debentures
etc. As per the response, shares are allotted to the public. If the
subscriptions are very high, allotment will be done on lottery or pro-rata
basis.
The company can sell the shares directly to the public, but it generally
hires brokers and underwriters. Merchant banks are another option to
help out with the process, especially Initial Public Offerings.
2] Private Placement
Public offers are an expensive affair. The incidental costs of IPO’s tend
to be very high. This is why some companies prefer not to go down this
route. They offer investment opportunities to a select few individuals.
So the company will sell its shares to financial institutes, banks,
insurance companies and some select individuals. This will help them
raise the funds efficiently, quickly and economically. Such companies
do not sell or offer their securities to the public at large.
3] Rights Issue
Generally, when a company is looking to expand or are in need of
additional funds, they first turn to their current investors. So the current
shareholders are given an opportunity to further invest in the company.
They are given the “right” to buy new shares before the public is offered
the chance.
This allotment of new shares is done on pro-rata basis. If the shareholder
chooses to execute his right and buy the shares, he will be allotted the
new shares. However, if the shareholder chooses to let go of his rights
issue, then these shares can be offered to the public.
4] e-IPO
It stands for Electronic Initial Public Offer. When a company wants to
offer its shares to the public it can now also do so online. An agreement
is signed between the company and the relevant stock exchange known
as the e-IPO.
This system was introduced in India some three years ago by the SEBI.
This makes the process of the IPO speedy and efficient. The company
will have to hire brokers to accept the applications received. And a
registrar to the issue must also be appointed.
Secondary Market
After the primary market is the secondary capital market. This is more
commonly known as the stock market or the stock exchange. Here the
securities (shares, debentures, bonds, bills etc) are bought and sold by
the investors.
The main point of difference between the primary and the secondary
market is that in the primary market only new securities were issued,
whereas in the secondary market the trading is for already existing
securities. There is no fresh issue in the secondary market.
The securities are traded in a highly regularised and legalized market
within strict rules and regulations. This ensures that the investors can
trade without the fear of being cheated. In the last decade or so due to
the advancement of technology, the secondary capital market in India
has seen a great boom.
https://www.toppr.com/guides/business-studies/financial-markets/capital-market/
Primary capital market- A market where new securities are bought
and sold for the first time

Types of issues in Primary market

• Initial public offer (IPO) (in case of an unlisted company),
• Follow-on public offer (FPO),
• Rights offer such that securities are offered to existing shareholders,
• Preferential issue/ bonus issue/ QIB placement
• Composite issue, that is, mixture of a rights and public offer, or offer
for sale (offer of securities by existing shareholders to the public for
subscription).

Secondary Market: In the secondary market the investors buy / sell

securities through stock exchanges. Trading of securities on stock
exchange results in exchange of money and securities between the
investors. Secondary market provides liquidity to the securities on the
exchange(s) and this activity commences subsequent to the original
issue. For example, having subscribed to the securities of a company, if
one wishes to sell the same, it can be done through the secondary
market. Similarly one can also buy the securities of a company from the
secondary market. A stock exchange is the single most important
institution in the secondary market for providing a platform to the
investors for buying and selling of securities through its members. In
other words, the stock exchange is the place where already issued
securities of companies are bought and sold by investors. Thus,
secondary market activity is different from the primary market in which
the issuers issue securities directly to the investors. Traditionally, a stock
exchange has been an association of its members or stock brokers,
formed for the purpose of facilitating the buying and selling of securities
by the public and institutions at large and regulating its day to day
operations. Of late however, stock exchanges in India now operate with
due recognition from Securities and Exchange Board of India (SEBI) /
the Government of India under the Securities Contracts (Regulation)
Act, 1956. The stock exchanges are either association of persons or are
formed as companies. There are 24 recognized stock exchanges in India
out of which one has not commenced its operations.
Out of the 23 remaining stock exchanges, currently only on four stock
exchanges, the trading volumes are recorded. Most of regional stock
exchanges have formed subsidiary companies and obtained membership
of Bombay Stock Exchange, (BSE) or National Stock Exchange (NSE)
or both. Members of these stock exchanges are now working as sub-
brokers of BSE / NSE brokers. Securities listed on the stock exchange(s)
have the following advantages:
• The stock exchange(s) provides a fair market place.
• It enhances liquidity.
• Their price is determined fairly.
• There is continuous reporting of their prices.
• Full information is available on the companies.
• Rights of investors are protected.

Settlement cycles:
Settlement is the process whereby the trader who has made purchases of
scrip makes payment and the seller selling the scrip delivers the
securities. This settlement process is carried out by Clearing Houses for
the stock exchanges. The Clearing House acts like an intermediary in
every transaction and acts as a seller to all buyers and buyer to all
sellers.

Significance of Capital Markets

A well functioning stock market may help the development process in an
economy through the following channels:
1. Growth of savings,
2. Efficient allocation of investment resources,
3. Better utilization of the existing resources.
In market economy like India, financial market institutions provide the
avenue by which long-term savings are mobilized and channelled into
investments. Confidence of the investors in the market is imperative for
the growth and development of the market. For any stock market, the
market Indices is the barometer of its performance and reflects the
prevailing sentiments of the entire economy. Stock index is created to
provide investors with the information regarding the average share price
in the stock market. The ups and downs in the index represent the
movement of the equity market. These indices need to represent the
return obtained by typical portfolios in the country. Generally, the stock
price of any company is vulnerable to three types of news:
• Company specific
• Industry specific
• Economy specific
An all share index includes stocks from all the sectors of the economy
and thus cancels out the stock and sector specific news and events that
affect stock prices, (law of portfolio diversification) and reflect the
overall performance of the company/equity market and the news
affecting it.
The most important use of an equity market index is as a benchmark for
a portfolio of stocks. All diversified portfolios, belonging either to retail
investors or mutual funds, use the common stock index as a yardstick for
their returns. Indices are useful in modern financial application of
derivatives.
Capital Market Instruments – some of the capital market instruments
are:
• Equity
• Preference shares
• Debenture/ Bonds
• ADRs/ GDRs
• Derivatives

Shares
The total capital of a company may be divided into small units called
shares. For example, if the required capital of a company is US
$5,00,000 and is divided into 50,000 units of US $10 each, each unit is
called a share of face value US $10. A share may be of any face value
depending upon the capital required and the number of shares into which
it is divided. The holders of the shares are called share holders. The
shares can be purchased or sold only in integral multiples. Equity shares
signify ownership in a corporation and represent claim over the financial
assets and earnings of the corporation. Shareholders enjoy voting rights
and the right to receive dividends; however in case of liquidation they
will receive residuals, after all the creditors of the company are settled in
full. A company may invite investors to subscribe for the shares by the
way of:
• Public issue through prospectus
• Tender/ book building process
• Offer for sale
• Placement method
• Rights issue

Stocks
The word stock refers to the old English law tradition where a share in
the capital of the company was not divided into “shares” of fixed
denomination but was issued as one chunk. This concept is no more
prevalent, but the word “stock” continues. The word “joint stock
companies” also refers to this tradition.
Debentures/ Bonds
The term Debenture is derived from the Latin word ‘debere’ which
means ‘to owe a debt’. A debenture is an acknowledgment of debt, taken
either from the public or a particular source. A debenture may be viewed
as a loan, represented as marketable security. The word “bond” may be
used interchangeably with debentures. Debt instruments with maturity
more than 5 years are called ‘bonds’
Yields
Most common method of calculating the yields on debt instrument is the
‘yield to maturity’ method, the formula is as under: YTM = coupon rate
+ prorated discount / (face value + purchase price)/2
Preference shares
Preference shares are different from ordinary equity shares. Preference
share holders have the following preferential rights
(i) The right to get a fixed rate of dividend before the payment of
dividend to the equity holders.
(ii) The right to get back their capital before the equity holders in case of
winding up of the company.
IPO
Conditions for IPO: (all conditions listed below to be satisfied)
• Net tangible assets of 3 crore in each of the preceding 3 full years, of
which not more than 50% are held in monetary assets:
• Track record of distributable profits for 3 out of the immediately
preceding 5 years:
• Net worth of 1 crore in each of the preceding three full years;
• Issue size of proposed issue + all previous issues made in the same
financial year does not exceed 5 times its pre-issue net worth as per the
audited balance sheet of the preceding financial year;
• In case of change of name within the last one year, 50% of the revenue
for the preceding 1 full year earned by it from the activity indicated by
the new name.

Derivatives
A derivative picks a risk or volatility in a financial asset, transaction,
market rate, or contingency, and creates a product the value of which
will change as per changes in the underlying risk or volatility. The idea
is that someone may either try to safeguard against such risk (hedging),
or someone may take the risk, or may engage in a trade on the
derivative, based on the view that they want to execute. The risk that a
derivative intends to trade is called underlying. A derivative is a
financial instrument, whose value depends on the values of basic
underlying variable. In the sense, derivatives is a financial instrument
that offers return based on the return of some other underlying asset, i.e
the return is derived from another instrument.
The best way will be take examples of uncertainties and the derivatives
that can be structured around the same.
• Stock prices are uncertain - Lot of forwards, options or futures
contracts are based on movements in prices of individual stocks or
groups of stocks.
• Prices of commodities are uncertain - There are forwards, futures and
options on commodities.
• Interest rates are uncertain - There are interest rate swaps and futures.
• Foreign exchange rates are uncertain - There are exchange rate
derivatives.
• Weather is uncertain - There are weather derivatives, and so on.

DERIVATIVES PRODUCTS
Some significant derivatives that are of interest to us are depicted in the
accompanying graph:
Major types of derivatives
FUTURES, FORWARDS AND OPTIONS
An option is different from futures in several ways. At practical level,
the option buyer faces an interesting situation. He pays for the options in
full at the time it is purchased. After this, he only has an upside. There is
no possibility of the options position generating any further losses to
him. This is different from futures, where one is free to enter, but can
generate huge losses. This characteristic makes options attractive to
many market participants who trade occasionally, who cannot put in the
time to closely monitor their futures position. Buying put options is like
buying insurance. To buy a put option on Nifty is to buy insurance
which reimburses the full amount to which Nifty drops below the strike
price of the put option. This is attractive to traders, and to mutual funds
creating “guaranteed return products”.

FORWARDS
A forward contract is an agreement to buy or sell an asset on a specified
date for a specified price. One of the parties to the contract assumes a
long position and agrees to buy the underlying asset on a certain
specified future date for a certain specified price. The other party
assumes a short position and agrees to sell the asset on the same date for
the same price, other contract details like delivery date, price and
quantity are negotiated bilaterally by the parties to the contract. The
forward contracts are normally traded outside the exchange.

FUTURES
Futures contract is a standardized transaction taking place on the futures
exchange. Futures market was designed to solve the problems that exist
in forward market. A futures contract is an agreement between two
parties, to buy or sell an asset at a certain time in the future at a certain
price, but unlike forward contracts, the futures contracts are standardized
and exchange traded To facilitate liquidity in the futures contracts, the
exchange specifies certain standard quantity and quality of the
underlying instrument that can be delivered, and a standard time for such
a settlement. Futures’ exchange has a division or subsidiary called a
clearing house that performs the specific responsibilities of paying and
collecting daily gains and losses as well as guaranteeing performance of
one party to other. A futures' contract can be offset prior to maturity by
entering into an equal and opposite transaction. The standardized items
in a futures contract are:
􀂾 Quantity of the underlying
􀂾 Quality of the underlying
􀂾 The date and month of delivery
􀂾 The units of price quotation and minimum price change

OPTIONS
An option is a contract, or a provision of a contract, that gives one party
(the option holder) the right, but not the obligation, to perform a
specified transaction with another party (the option issuer or option
writer) according to the specified terms. The owner of a property might
sell another party an option to purchase the property any time during the
next three months at a specified price. For every buyer of an option there
must be a seller. The seller is often referred to as the writer. As with
futures, options are brought into existence by being traded, if none is
traded, none exists; conversely, there is no limit to the number of option
contracts that can be in existence at any time. As with futures, the
process of closing out options positions will cause contracts to cease to
exist, diminishing the total number. Thus an option is the right to buy or
sell a specified amount of a financial instrument at a pre-arranged price
on or before a particular date. There are two options which can be
exercised:
􀂾 Call option, the right to buy is referred to as a call option.
􀂾 Put option, the right to sell is referred as a put option.

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors . Some of the factors

which influence capital market are as follows:-
A)Performance of domestic companies:-
The performance of the companies or rather corporate earnings is one of
the factors which has direct impact or effect on capital market in a
country. Weak corporate earnings indicate that the demand for goods
and services in the economy is less due to slow growth in per capita
income of people . Because of slow growth in demand there is slow
growth in employment which means slow growth in demand in the near
future. Thus weak corporate earnings indicate average or not so good
prospects for the economy as a whole in the near term. In such a
scenario the investors ( both domestic as well as foreign ) would be wary
to invest in the capital market and thus there is bear market like
situation. The opposite case of it would be robust corporate earnings and
it’s positive impact on the capital market.

B) Environmental Factors :-
Environmental Factor in India’s context primarily means- Monsoon . In
India around 60 % of agricultural production is dependent on monsoon.
Thus there is heavy dependence on monsoon. The major chunk of
agricultural production comes from the states of Punjab , Haryana &
Uttar Pradesh. Thus deficient or delayed monsoon in this part of the
country would directly affect the agricultural output in the country.
Apart from monsoon other natural calamities like Floods, sunami,
drought, earthquake, etc. also have an impact on the capital market of a
country. The Indian Met Department (IMD) on 24th June stated that
India would receive only 93 % rainfall of Long Period Average (LPA).
This piece of news directly had an impact on Indian capital market with
BSE Sensex falling by 0.5 % on the 25th June . The major losers were
automakers and consumer goods firms since the below normal monsoon
forecast triggered concerns that demand in the crucial rural heartland
would take a hit. This is because a deficient monsoon could seriously
squeeze rural incomes, reduce the demand for everything from
motorbikes to soaps and worsen a slowing economy.

C) Macro Economic Numbers :-

The macro economic numbers also influence the capital market. It
includes Index of Industrial Production (IIP) which is released every
month, annual Inflation number indicated by Wholesale Price Index
(WPI) which is released every week, Export – Import numbers which
are declared every month, Core Industries growth rate ( It includes Six
Core infrastructure industries – Coal, Crude oil, refining, power, cement
and finished steel) which comes out every month, etc. This macro –
economic indicators indicate the state of the economy and the direction
in which the economy is headed and therefore impacts the capital market
in India. A case in the point was declaration of core industries growth
figure.

D) Global Cues :-
In this world of globalization various economies are interdependent and
interconnected. An event in one part of the world is bound to affect other
parts of the world , however the magnitude and intensity of impact
would vary. Thus capital market in India is also affected by
developments in other parts of the world i.e. U.S. , Europe, Japan , etc.
Global cues includes corporate earnings of MNC’s, consumer
confidence index in developed countries, jobless claims in developed
countries, global growth outlook given by various agencies like IMF,
economic growth of major economies, price of crude –oil, credit rating
of various economies given by Moody’s, S & P, etc.

E) Political stability and government policies:-

For any economy to achieve and sustain growth it has to have political
stability and pro- growth government policies. This is because when
there is political stability there is stability and consistency in
government’s attitude which is communicated through various
government policies. The vice- versa is the case when there is no
political stability .So capital market also reacts to the nature of
government, attitude of government, and various policies of the
government.

F) Growth prospectus of an economy:-

When the national income of the country increases and per capita
income of people increases it is said that the economy is growing.
Higher income also means higher expenditure and higher savings. This
augurs well for the economy as higher expenditure means higher
demand and higher savings means higher investment. Thus when an
economy is growing at a good pace capital market of the country attracts
more money from investors, both from within and outside the country
and vice -versa. So we can say that growth prospects of an economy do
have an impact on capital markets.

G) Investor Sentiment and risk appetite :-

Another factor which influences capital market is investor sentiment and
their risk appetite .Even if the investors have the money to invest but if
they are not confident about the returns from their investment , they may
stay away from investment for some time.At the same time the investors
have low risk appetite , which they were having in global and Indian
capital market some four to five months back due to global financial
meltdown and recessionary situation in U.S. & some parts of Europe ,
they may stay away from investment and wait for the right time to come.

What is Investment ?

Meaning

In simple terms, Investment refers to purchase of financial assets. While

Investment Goods are those goods, which are used for further
production.
Investment implies the production of new capital goods, plants and
equipments

Different types of Investment available in India

In this article you will find many available options to make an

investment. A number of options are available today for a person to
invest his money and make a decent return. Let’s take a skim through all
those schemes.

1. Financial Assests (that can not be traded)

A number of financial assets can not be traded with a third party. Such
schemes are listed below.

 Bank Deposits: It’s simple and every one knows about it.
 Post Office Savings
 Provident Funds
 Chit Funds
 Company Deposits

2. Bonds

Bonds are debt securities or long term debt instruments. An authorized

issuer of bond promises the person who hods the bond to pay interest on
particular periods and to return the principal after a fixed period (at the
time of maturity of the bond). Different types of bonds are;

 Government Securities
 Government Agency Securities
 PSU Bonds
 Private Debt Securities
 Preference Shares

3. Stocks

Stocks represent ownership. A person who holds stocks of a particular

company is treated as one of the many owners of the company and
deserves a share of the net profit that company earns after all expenses.
Stocks is one of the best investment options available and at the same
time it demands knowledge about many fundamentals to make a decent
return. Different types of stocks (as classified by financial analysts)
  Growth Stocks
 Value Stocks
 Blue Chip Stocks
 Income Stocks

5. Mutual Funds

Mutual Funds are a better investment option for those who can’t find
time to learn about stock market and it’s trends or those who don’t
understand it’s working correctly.Mutual funds are usually managed by
a Private financial company or a Bank. Different types of mutual funds
are;

 Stock based schemes

 Fixed income schemes
 Monthly income schemes
 Tax saving schemes
 Hybrid schemes
 Balance schemes
 Sector schemes
 Floating rate schemes

6. Insurance

Insurance is also a form of investment. Different types of insurance

investments are;

 Endowment assurance policy

 Money back policy
 Whole Life policy
 Term assurance policy
  Unit Linked Policy – ULIP

7. Financial Derivatives

These are financial instruments that are formed from value addition of
the financial assets used for investment. Two types are there;

 Options
 Futures

SECURITIES AND EXCHANGE BOARD OF INDIA

It was formed officially by the Government of India in 1992 with SEBI
Act 1992 being passed by the Indian Parliament. SEBI is headquartered
in the business district of Bandra Kurla Complex complex in Mumbai,
and has Northern, Eastern, Southern and Western regional offices in
New Delhi, Kolkata, Chennai and Ahmedabad.

Controller of Capital Issues was the regulatory authority before SEBI

came into existence; it derived authority from the Capital Issues
(Control) Act, 1947.

Initially SEBI was a non statutory body without any statutory power.
However in 1995, the SEBI was given additional statutory power by the
Government of India through an amendment to the Securities and
Exchange Board of India Act 1992. In April, 1998 the SEBI was
constituted as the regulator of capital markets in India under a resolution
of the Government of India.
The SEBI is managed by six members, i.e. by the chairman who is
nominated by central government & two members, i.e. officers of central
ministry, one member from the RBI & the remaining two are nominated
by the central government. The office of SEBI is situated at Mumbai
with its regional offices at Kolkata, Delhi & Chennai.

FUNCTIONS AND RESPONSIBILITIES

SEBI has to be responsive to the needs of three groups, which constitute

the market:

 the issuers of securities

 the investors
 the market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasi-
judicial and quasi-executive. It drafts regulations in its legislative
capacity, it conducts investigation and enforcement action in its
executive function and it passes rulings and orders in its judicial
capacity. Though this makes it very powerful, there is an appeals process
to create accountability. There is a Securities Appellate Tribunal which
is a three-member tribunal. A second appeal lies directly to the Supreme
Court.
SEBI has enjoyed success as a regulator by pushing systemic reforms
aggressively and successively (e.g. the quick movement towards making
the markets electronic and paperless rolling settlement on T+2 basis).
SEBI has been active in setting up the regulations as required under law.

SEBI has also been instrumental in taking quick and effective steps in
light of the global meltdown and the Satyam fiasco. It had increased the
extent and quantity of disclosures to be made by Indian corporate
promoters. More recently, in light of the global meltdown,it liberalised
the takeover code to facilitate investments by removing regulatory
structures. In one such move, SEBI has increased the application limit
for retail investors to Rs 2 lakh, from Rs 1 lakh at present.

POWERS

For the discharge of its functions efficiently, SEBI has been invested
with the necessary powers which are:

1. to approve by−laws of stock exchanges.

2. to require the stock exchange to amend their by−laws.
3. inspect the books of accounts and call for periodical returns from
recognized stock exchanges.
4. inspect the books of accounts of a financial intermediaries.
5. compel certain companies to list their shares in one or more stock
exchanges.

SEBI Committees

1. Technical Advisory Committee

2. Committee for review of structure of market infrastructure
institutions
 3. Members of the Advisory Committee for the SEBI Investor
Protection and Education Fund
4. Takeover Regulations Advisory Committee
5. Primary Market Advisory Committee (PMAC)
6. Secondary Market Advisory Committee (SMAC)
7. Mutual Fund Advisory Committee
8. Corporate Bonds & Securitization Advisory Committee
9. Takeover Panel
10. SEBI Committee on Disclosures and Accounting Standards
(SCODA)
11. High Powered Advisory Committee on consent orders and
compounding of offences
12. Derivatives Market Review Committee
13. Committee on Infrastructure Funds

STOCK EXCHANGE
Meaning

Stock Exchange (also called Stock Market or Share Market) is one

important constituent of capital market. Stock Exchange is an organized
market for the purchase and sale of industrial and financial security. It is
convenient place where trading in securities is conducted in systematic
manner i.e. as per certain rules and regulations.

It performs various functions and offers useful services to investors and

borrowing companies. It is an investment intermediary and facilitates
economic and industrial development of a country.

Stock exchange is an organized market for buying and selling corporate

and other securities. Here, securities are purchased and sold out as per
certain well-defined rules and regulations. It provides a convenient and
secured mechanism or platform for transactions in different securities.
Such securities include shares and debentures issued by public
companies which are duly listed at the stock exchange, and bonds and
debentures issued by government, public corporations and municipal and
port trust bodies.

Stock exchanges are indispensable for the smooth and orderly

functioning of corporate sector in a free market economy. A stock
exchange need not be treated as a place for speculation or a gambling
den. It should act as a place for safe and profitable investment, for this,
effective control on the working of stock exchange is necessary. This
will avoid misuse of this platform for excessive speculation, scams and
other undesirable and anti-social activities.

Definitions of Stock Exchange

"Stock exchanges are privately organized markets which are used to

facilitate trading in securities."

The Indian Securities Contracts (Regulation) Act of 1956, defines Stock

Exchange as,

"An association, organization or body of individuals, whether

incorporated or not, established for the purpose of assisting, regulating
and controlling business in buying, selling and dealing in securities."

Features of Stock Exchange

Characteristics or features of stock exchange are:-

1. Market for securities : Stock exchange is a market, where securities

of corporate bodies, government and semi-government bodies are
bought and sold.
2. Deals in second hand securities : It deals with shares, debentures
bonds and such securities already issued by the companies. In short it
deals with existing or second hand securities and hence it is called
secondary market.
3. Regulates trade in securities : Stock exchange does not buy or sell
any securities on its own account. It merely provides the necessary
infrastructure and facilities for trade in securities to its members and
brokers who trade in securities. It regulates the trade activities so as to
ensure free and fair trade
4. Allows dealings only in listed securities : In fact, stock exchanges
maintain an official list of securities that could be purchased and sold
on its floor. Securities which do not figure in the official list of stock
exchange are called unlisted securities. Such unlisted securities cannot
be traded in the stock exchange.
5. Transactions effected only through members : All the transactions
in securities at the stock exchange are effected only through its
authorised brokers and members. Outsiders or direct investors are not
allowed to enter in the trading circles of the stock exchange. Investors
have to buy or sell the securities at the stock exchange through the
authorised brokers only.
6. Association of persons : A stock exchange is an association of
persons or body of individuals which may be registered or
unregistered.
7. Recognition from Central Government : Stock exchange is an
organised market. It requires recognition from the Central
Government.
8. Working as per rules : Buying and selling transactions in securities at
the stock exchange are governed by the rules and regulations of stock
exchange as well as SEBI Guidelines. No deviation from the rules
and guidelines is allowed in any case.
9. Specific location : Stock exchange is a particular market place where
authorised brokers come together daily (i.e. on working days) on the
floor of market called trading circles and conduct trading activities.
The prices of different securities traded are shown on electronic
boards. After the working hours market is closed. All the working of
stock exchanges is conducted and controlled through computers and
electronic system.
10. Financial Barometers : Stock exchanges are the financial
barometers and development indicators of national economy of the
country. Industrial growth and stability is reflected in the index of
stock exchange.

BOMBAY STOCK EXCHANGE LIMITED

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a
rich heritage. Popularly known as "BSE", it was established as "The Native
Share & Stock Brokers Association" in 1875. It is the first stock exchange in
the country to obtain permanent recognition in 1956 from the Government of
India under the Securities Contracts (Regulation) Act, 1956.The Exchange's
pivotal and pre-eminent role in the development of the Indian capital market is
widely recognized and its index, SENSEX, is tracked worldwide. Earlier an
Association of Persons (AOP), the Exchange is now a demutualised and
corporatised entity incorporated under the provisions of the Companies Act,
1956, pursuant to the BSE(Corporatisation and Demutualisation) Scheme,
2005 notified by the Securities and Exchange Board of India (SEBI).
With demutualisation, the trading rights and ownership rights have been de-
linked effectively addressing concerns regarding perceived and real conflicts
of interest. The Exchange is professionally managed under the overall
direction of the Board of Directors.The Board comprises eminent
professionals, representatives of Trading Members and the Managing Director
of the Exchange. The Board is inclusive and is designed to benefit from
theparticipation of market intermediaries.

In terms of organisation structure, the Board formulates larger policy issues

and exercises over-all control. The committees constituted by the Board are
broad-based.The day-to-dayoperations of the Exchange are managed by the
Managing Director and a management team of professionals.

The Exchange has a nation-wide reach with a presence in 417 cities and towns
of India. The systems and processes of the Exchange are designed to safeguard
market integrity and enhance transparency in operations. During the year
2004-2005, the trading volumes on the Exchange showed robust growth.

The Exchange provides an efficient and transparent market for trading in

equity, debt instruments and derivatives. The BSE's On Line Trading System
(BOLT) is a proprietory system of the Exchange and is BS 7799-2-2002
certified. The surveillance and clearing & settlement functions of the Exchange
are ISO 9001:2000 certified.
NATIONAL STOCK EXCHANGE

THE National Stock Exchange of India is a stock Exchange that is

located in Mumbai, Maharashtra. The National Stock Exchange
basically function in three market sections, that is, (CM) the Capital
Market Section); F&Q (The Future and Options Market Sections) and
WDM (Wholesale Debt Market Segment). It is important place where
the trading of shares, debt etc takes place.

It was in year 1992 that the National stock Exchange was for the first
time incorporated in India. It was not regarded as a stock exchange at
once. Rather, the national Stock exchange was incorporated as a tax
paying company and had got the recognition of a stock exchange only
in year 1993 the recognition was given under the provisions of the
Securities Contracts (Regulation) Act, 1956.

The National Stock exchange is highly active in the field of market

capitalization and thus aiming it the ninth largest stock exchange in
the said field. Similarly, the trading of the stock exchange in equities
and derivatives is so high that it has resulted in high turnovers and
thus making it the largest stock exchange in India.

It is the stock exchange wherein there is the facility of electronic

exchange offering investors. This facility is available in almost types
of equitable transactions such as equities, debentures, etc. it is also the
largest stock exchange if calculated in the terms of traded values.
ROLE OF CAPITAL MARKET