2. Capital Market
A good money market is an essential pre-requisite for the industrial
development of a country.
Credit generally required and supplied on short term and long term basis.
The money market caters to the short term needs only.
The long term capital needs are met by the capital market.
The development of a good capital market in a country is dependent upon
the availability of saving, proper organisation of its constituent units and
the entrepreneurship qualities of its people etc.
Before independence the capital market of India was ill developed
because of its certain defects. But now the capital market in India
substantially changed
3. The term capital market refers to the institutional arrangements for facilitating
the borrowing and lending of long term funds.
It consists of a series of channels through which the saving community are made
available for industrial and commercial enterprises and public authorities.
A capital market may be defined as organised mechanism for effective and
efficient transfer of money capital or financial resources from the investing
parties i.e individuals or institutional savers to the entrepreneurs engaged in
industry or commerce in the business either be in the private or public sector of
an economy.
An organised and well developed capital market operating in a free market
economy ,and it ensures best possible coordination and balance between flow of
savings on the one hand and flow of investment leading to capital formation on
the other and it directs the flow of saving into most profitable channels and
thereby ensures optimum utilization of financial resources.
4. FUNCTIONS OF CAPITAL MARKET
1. Capital Formation- By championing savings and making them available to
companies and public authorities
2. The capital market offers access to a variety of financial instruments that enable
economic agents to pool, price and exchange risk.
3. It encourages saving in financial form- Through assets with attractive yields,
liquidity and risk characteristics.
4. Through the stock exchange, the market gives long term lenders the opportunity to
convert their holding into cash. It also offers companies which have securities the
opportunity to obtain cash without reducing their liquidity.
5. The capital market plays an important role in mobilizing funds and resources
needed for development and offers the forum for implementing its policies relating
to stabilization, monetary controls and regulation of the banking system.
5. Structure of Indian Capital Market
The Capital Market in India classified into two categories such as Organised and
Unorganised.
In the organised sector capital market demand for long term capital comes from
corporate enterprises, public sector enterprises, government and semi government
institutions.
The sources of supply of funds comprises individual investors ,investment
intermediaries ,financial institutions, commercial banks and government.
The unorganised sector of the capital market consists of indigenous bankers and
private money lenders.
The main demand in the unorganized capital market comes from the agriculturists,
private individuals for the consumption rather than production.
The supply of money capital comes usually from own resources of money lenders.
6. Components of Capital Market
1. New Issue market or Primary Market
2. Stock Market or Secondary Market
7. New Issue market or Primary Market
New issue market represents the primary market where new securities i.e shares or bonds
that have never been previously issued, are offered.
Both new companies and the existing ones can raise capital on the new issue market.
The prime function of the new issue market is to facilitate the transfer of funds from the
willing investors to the entrepreneurs setting up new corporate enterprises or going in for
expansion , diversification , growth or modernisation.
Helping corporate enterprises in securing their funds, the new issue market channelizes the
savings of individuals and others into investment.
The organization of new issue market is not complete without the specialised agencies ,
intermediaries and institutions etc.
They promote issues of new securities and help in selling ,transferring, underwriting etc.
These agencies include financial institutions , underwriters , brokers , merchant bankers etc.
8. The new issue market directs the flow of saving into long term investments, it is of
paramount importance for the economic growth and industrial development of a
country.
The availability of financial resources for corporates enterprises to a great extent
depends upon the status of the new issue market of the country.
The functions and organisation of new issue market are quite different from that of
secondary market(stock).
The stock market is more sensitive and reacts fast to the changes in the economic
,political and business conditions of a country . But then this affects new issue market
also.
The historical study of the activity in the two markets shows that whenever there has
been boom in the stock market, there has been increased activity in the new issue
market also.
10. 1. Equity Shares
Equity shares also known as ordinary shares or common shares, represents the
companies owner’s capital in a company.
The owners of this shares are the real owners of the company.
Equity share holders are paid dividend after paying it to the preference shareholders.
The rate of dividend on these shares depends upon the profits of the company.
They may be paid higher rate of dividend or they may not get anything.
These shareholders take more risk compared to preference shareholders.
Equity holder can get out of the company at any time by selling them in the stock
exchange , provided they are listed there.
Companies which make huge profits issue bonus shares to equity shares holders free of
cost. This will be in proportion to the number of equity shares held by them.
11. 2. Preference Shares
A preference share is a complex financial instrument.
It is a hybrid one as it has ownership like equity and fixed income like debentures.
The holders of preference shares are entitled to income, after the claims of creditors of the
company have been met , but before the ordinary shareholders receive any income.
They enjoy preference in repayment of capital in case of winding up of the company.
Classification of Preference shares,
1.Cumulative and Non-cumulative
2.Redeemable and Irredeemable
3.Convertible and Non-convertible
4.Participating and Non-participating
12. 3. Debentures and Bonds
Debentures is a debt instrument with a promise to pay interest and repay the principal on
maturity.
It is issued by a joint stock company.
Bonds are debentures issues by public sector undertaking.
Features
1. A debenture is always in a written from.
2. It is an acknowledgement of indebtedness
3. Fixed rate of interest is paid on debentures a regular interval of time.
4. Debenture holders do not enjoy voting rights.
13. Stock Exchange
Stock exchange is an organization which facilitate the sale and purchase of existing and
listed securities.
The securities traded include shares and debentures of companies, government securities,
shares and bonds issued by municipal bodies ,port trust etc.
Well regulated and active stock market promote capital formation.
The existence of stock market promotes the growth of the primary market.
14. General features of Stock Exchange
Stock exchange is an organized place where securities are traded.
Only listed securities are traded in stock market.
It is voluntary association registered by certain statutory laws to provide facilities to its
members for trading.
It has a governing body elected by its members. The government will have its nominees
in this body. It controls the activities of the organization.
A stock exchange supplies reliable and regular information about the securities.
The members of the stock exchange are bound to obey the rules and regulations
formulated by the Stock Exchange Act of 1956.
Membership will be terminated if these rules are violated.
15. Functions of a Stock Exchange
By providing a market place for the sale and purchase of securities like shares,
debentures, bonds etc. Stock exchange ensures liquidity and marketability to the existing
securities.
It enhance the economic development of a country by mobilizing the savings and
channelizing them to the most efficient avenues of production.
Ready information about the values of various listed securities are regularly provided by
the stock exchanges.
By providing the market prices of various securities , stock exchanges make a collective
judgment and serve as a barometer of the economy.
Stock Exchange avoid malpractices and ensure transparency in the stock market , protect
the interests of the investors.
16. Stock Exchanges in India and Abroad
In India , the genesis of stock exchanges can be traced back to the later half of the 19th
century.
Owing to the share mania of the public , the number of brokers dealing in shares
increased.
In1875, the brokers organized an informal association in Bombay named “ The Native
Stock and Share Brokers Association”.
Later it came to known as Bombay Stock Exchange.
The number of official Stock exchanges in In India increased from 9 in 1979-80 to 23 by
the end of March 2003.
India has the largest number of organized and recognized stock exchanges in the world.
All of them are regulated by SEBI.
17. Stock Exchanges in India and Abroad
In the world at large, the first stock exchange established in London in 1773.
Today almost all countries has stock exchanges.
The strength of the economy is represented by the strength of its stock exchanges.
Today , the most leading stock exchanges are New York Stock Exchange, Tokyo Stock
Exchange, London Stock Exchange.
The New York Stock Exchange is the largest stock exchange in terms of dollar volume.
NASDAQ (1971) has more trades per day than any other stock exchanges.
18. Bombay Stock Exchange
(BSE)
BSE is a premier stock exchange in India.
It is the biggest in terms of the secondary market turnover and the total listed
companies and their paid up capital.
It is the oldest market in Asia and has been recognized permanently , while other
exchanges have to renew every five years.
Its business is no longer confined to Mumbai alone , at end of 1997 there were 100
other cities in which it had set up business.
BSE located in the Dalal Street of Mumbai.
Today about 5000 companies have been listed in the BSE and on an average 70,000
deals are executed per day.
The Market Index of BSE is the “SENSEX”
19. National Stock Exchange
(NSE)
The government of India appointed a high power committee in 1991 in order to
setting up a new stock exchange.
To avoid congestions, complications and inadequacies in the existing stock
exchanges.
In accordance with the recommendations of the committee, the National Stock
Exchange of India setup in 1992 in Mumbai.
NSE has fully automated ,electric screen based trading system.
It is the third largest stock exchange in the world in terms of number of equity
shares traded.
First exchange in the world to use satellite communication technology for
trading.
