1.
CAPITAL MARKET
Mr. Vikash Barnwal
Assistant Professor
Faculty of business studies
Kashi institute of technology

2.
CAPITAL MARKET
 Capital market is a place where buyers and sellers indulge in trade
(buying/selling) of financial securities like bonds, stocks, etc. The trading is
undertaken by participants such as individuals and institutions.
 Capital market trades mostly in long-term securities. The magnitude of a
nation’s capital markets is directly interconnected to the size of its economy
which means that ripples in one corner can cause major waves somewhere
else.

3.
Features/Characteristics of Capital Market:
1. Link between savers and investors:
The capital market acts as an important link between savers and investors
 The savers (lenders of funds)
 investors (borrowers of funds)
 The savers who do not spend all their income are called “Surplus units”
 the investors/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.
2. Deals in Long Term fund:
 Capital market provides funds for long and medium term.
 It does not deal with channelizing saving for less than one year.

4.
3. Utilizes Intermediaries:
Capital market makes use of different intermediaries such as
a) brokers
b) underwriters
c) depositories etc.
These intermediaries act as working organs of capital market and are very
important elements of capital market and are very important elements of
capital market.
4. Capital formation: The capital market prides incentives to savers in the
form of interest or dividend to transfer their surplus fund into the deficit units
who will invest it in different businesses.
The transfer of funds by the surplus units to the
deficit units leads to capital formation.

5.
5. Government Rules and Regulations:
 The capital market operates freely but under the guidance of government
policies.
 These markets function within the framework of government rules and
regulations e.g., stock exchange works under the regulations of SEBI which is
a government body.

6.
An ideal capital market is one:
1. Where finance is available at reasonable cost.
2. Which facilitates economic growth.
3. Where market operations are free, fair, competitive and transparent.
4. Must provide sufficient information to investors.
5. Must allocate capital productively

7.
Importance or Functions of Capital Market:
The capital market plays an important role in mobilizing saving and channel 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.
1. Link between savers and investors:
2. Basis for industrialization:
3. Accelerating the pace of growth:
4. Generating liquidity:
5. Increase the national income:
6. Productive investment
7. Stabilization of the value of securities:
8. Capital formation:

8.
1. Link between savers and investors:
 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 investors/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

9.
Basis for industrialization:
 Capital market generates long term funds, which are essential for the establishment of
industries. Thus, capital market acts as a basis for industrialization.
Accelerating the pace of growth:
Easy and smooth availability of funds for medium and long period encourages the
entrepreneurs to take profitable ventures/businesses in the field of trade, industry,
commerce and even agriculture.
It results in the all round economic growth and accelerates
the pace of economic development

10.
Generating liquidity:
Liquidity means convertibility into cash. Shares of the public companies are transferable i.e., in
case of financial requirements these shares can be sold in the stock market and the cash can be
obtained. This is how capital market generates liquidity.
Increase the national income:
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 increase the national income.
Capital formation:
The capital market prides incentives to savers in the form of interest or dividend to
transfer their surplus fund into the deficit units who will invest it in different
businesses. The transfer of funds by the surplus units to the deficit units leads to capital
formation.

11.
Productive investment:
The capital market provides a mechanism for those who have savings transfer their
savings to those who need funds for productive investments. It diverts resources
from wasteful and unproductive channels such as gold, jewelry, conspicuous
consumption, etc. to productive investments.
Stabilization of the value of securities:
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 minimizing
speculative activities.

12.
 Encourages economic growth:
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
encouraging/ inducing economic growth.

13.
Government Securities Market : This is also known as the Gilt-edged market. This
refers to the market for government and semi-government securities backed by the
Reserve Bank of India (RBI).
Industrial Securities Market : This is a market for industrial securities i.e. market for
shares and debentures of the existing and new corporate firms.
 Buying and selling of such instruments take place in this market. This market is
further classified into two types such as the New Issues Market (Primary) and the
Old (Existing) Issues Market (secondary).
 In primary market fresh capital is raised by companies by issuing new shares,
bonds, units of mutual funds and debentures.
 However in the secondary market already existing i.e old shares and debentures
are traded.
This trading takes place through the registered stock exchanges. In India we have
three prominent stock exchanges.
 Bombay Stock Exchange (BSE),
 the National Stock Exchange (NSE) and
 Over The Counter Exchange of India (OTCEI).

14.
 Development Financial Institutions (DFIs) :
This is yet another important segment of Indian capital market. This comprises
various financial institutions. These can be special purpose institutions like IFCI,
ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term
finance for those purposes for which they are set up.
 Financial Intermediaries :
The fourth important segment of the Indian capital market is the financial
intermediaries. This comprises various merchant banking institutions, mutual
funds, leasing finance companies, venture capital companies and other financial
institutions.

15.
SEBI Regulates Indian Capital Market
 For the smooth functioning of the capital market a proper coordination among
above organizations and segments is a prerequisite.
 In order to regulate, promote and direct the progress of the Indian Capital
Market, the government has set up 'Securities and Exchange Board of India'
(SEBI).
 SEBI is the supreme authority governing and regulating the Capital Market of
India.

16.
Types of Capital Market
 Primary Market : Primary market is the market for new shares or securities. A primary market is
one in which a company issues new securities in exchange for cash from an investor (buyer).It
deals with trade of new issues of stocks and other securities sold to the investors.
 Secondary Market :Secondary market deals with the exchange of prevailing or previously-issued
securities among investors. Once new securities have been sold in the primary market, an efficient
manner must exist for their resale. Secondary markets give investors the means to resell/ trade
existing securities. Another important division in the capital market is made on the basis of the
nature of security sold or bought, i.e. stock market and bond market.

17.
Capital Market Instruments
There are mainly two types of instruments that are traded in the capital market,
which are:
 Stocks: Stocks are sold and bought over a stock exchange, They represent
ownership in the company and the buyer of the share is referred as the
shareholder.
 Bonds: The debt securities which are traded in the capital market are known as
the bonds. Companies issue bonds for in order to raise capital foe the expansion
of the business and growth.

18.
New Issue Market (Primary Market)
 When a company issues their new stocks or bonds in the market for selling, it
is called a new issue market.
 The stocks are issued in the market, and investors buy those stocks from the
online or offline market.
 The companies issue their stocks to get some capital to run their business.
The stocks can be issues of old or new companies.
Type of Issue
1. I.P.O (Initial Public issue) issued by Unlisted company (first time)
2. F.P.O (Further Public issue) issued by listed company (Further issued)

19.
Types of New Issue Market
 1. Public Issue
 2. Offer for Sale
 3. Private Placement
 4. Right Issue
 5. Book Building

20.
1. Public Issue:
 The company that issues its stocks offers them directly to the public. The
company offers a fixed number of shares, and capital is mentioned in the
company’s prospectus.
 When the company issues its share in the market, interested investors take the
company’s prospectus.
 In the prospectus, investors can see details of the company, which will help the
investor to decide. The organization guarantees the issue shares at the market
value.
 The public can know everything about the company in the prospectus, such as
authorized capital, name of brokers, underwriters, and bankers.
2. Offer for Sale
 The company sells its shares through brokers or issue houses. The sale of shares of
the company is guaranteed by the underwriters.
 The companies offer shares to the brokers at lower prices, and brokers earn huge
interest by selling the shares.
 There is a difference in the price of the company shares and the price at which
investors buy. It is because the brokers offer shares to the public at high prices.

21.
3. Private Placement
 Some investors are involved in private placements, such as insurance
companies, mutual funds, and banks. In the public issue, the shares are issued
to the public, but it doesn’t happen in a private placement.
 In private placement, there is no role of underwriters and prospectus. The
brokers and issue houses take responsibility for selling the company’s shares.
4. Right Issue
 When an old company that already has shareholders wants to release more
shares in the market is called the right issue.
 The company takes permission from SEBI and then issues its right shares in the
market.
5. Book Building
 The underwriter analyzes the demand and supply of the company shares
during the initial public offering. In book building, the company invites bids
from merchants to sell their shares instead of offering shares to the public.
 After buying the shares, it is the responsibility of the merchant to sell the
shares of the company. The companies sell their shares to professional and
qualified merchant bidders.

22.
Features of New issue Market
 1. The new issue market is related to new issues. When an old or new
company sells a fixed number of shares which is called Initial public
offering(IPO).
 2. Another feature of the new issue market is new issues are offered in the
market, but there is no specific place to issue the shares.
 3. New issue market has numerous methods of floating capital such as an
offer for sale, public issue, and private placement.

23.
Functions of New Issue Market

24.
Origination
The agencies investigate, analyze and process new proposals. The agencies study the legal,
technical, and economical aspects of issuing companies.
To succeed in issuing shares, specialized agencies analyze the time of floating of an issue,
price, and types of issues.
Underwriting
It is a kind of guarantee taken by the company that they are issuing fixed numbers of shares
in the market. The subscription gets guaranteed even if the public does not buy the shares.
Distribution and Mechanics of Floating New Issues
The role of a new issue market is to sell their shares to the brokers, and brokers sell them in
the market. The brokers maintain the list of clients who invest in the company shares.
Functions of New Issue Market

25.
ROLE OF CAPITAL MARKET
 Proper Regulation of Funds : Capital markets not only helps in fund
mobilization, but it also helps in proper allocation of these resources. It can
have regulation over the resources so that it can direct funds in a qualitative
manner.
 Service Provision : As an important financial set up capital market provides
various types of services. It includes long term and medium term loans to
industry, underwriting services, consultancy services, export finance, etc.
These services help the manufacturing sector in a large spectrum.
 Continuous Availability of Funds : Capital market is place where the
investment avenue is continuously available for long term investment. This is a
liquid market as it makes fund available on continues basis. Both buyers and
seller can easily buy and sell securities as they are continuously available.
Basically capital market transactions are related to the stock exchanges. Thus
marketability in the capital market becomes easy.

26.
• Mobilization of Savings : Capital market is an important source for mobilizing idle
savings from the economy. It mobilizes funds from people for further investments in
the productive channels of an economy. In that sense it activate the ideal monetary
resources and puts them in proper investments.
• Capital Formation: Capital market helps in capital formation. Capital formation is
net addition to the existing stock of capital in the economy. Through mobilization of
ideal resources it generates savings; the mobilized savings are made available to
various segments such as agriculture, industry, etc. This helps in increasing capital
formation.
• Provision of Investment Avenue : Capital market raises resources for longer periods of
time. Thus it provides an investment avenue for people who wish to invest resources for
a long period of time. It provides suitable interest rate returns also to investors.
Instruments such as bonds, equities, units of mutual funds, insurance policies, etc.
definitely provides diverse investment avenue for the public.

27.
REFORMS IN CAPITAL MARKET
 The major reforms undertaken in capital market of India includes:-
• Establishment of SEBI : The Securities and Exchange Board of India (SEBI) was
established in 1988. It got a legal status in 1992. SEBI was primarily set up to
regulate the activities of the merchant banks, to control the operations of mutual
funds, to work as a promoter of the stock exchange activities and to act as a
regulatory authority of new issue activities ofcompanies.
The main functions of SEBI are:-
 To regulate the business of the stock market and other securities market.
 Topromote and regulate the self regulatory organizations.
 Toprohibit fraudulent and unfair trade practices in securities market.
 To promote awareness among investors and training of intermediaries about
safety of market.
 Toprohibit insider trading in securities market.
 Toregulate huge acquisition of shares and takeover of companies.

28.
• Increasing of Merchant Banking Activities : Many Indian and foreign
commercial banks have set up their merchant banking divisions in the last few
years. These divisions provide financial services such as underwriting
facilities, issue organising, consultancy services, etc. It has proved as a helping
hand to factors related to the capital market.
• Candid Performance of Indian Economy : In the last few years, Indian
economy is growing at a good speed. It has attracted a huge inflow of Foreign
Institutional Investments (FII). The massive entry of FIIs in the Indian capital
market has given good appreciation for the Indian investors in recent times.
Similarly many new companies are emerging on the horizon of the Indian
capital market to raise capital for their expansions.
• Growing Mutual Fund Industry : The growing of mutual funds in India has
certainly helped the capital market to grow. Public sector banks, foreign banks,
financial institutions and joint mutual funds between the Indian and foreign
firms have launched many new funds. A big diversification in terms of
schemes, maturity, etc. has taken place in mutual funds in India. It has given a
wide choice for the common investors to enter the capital market.

29.
Investor's Protection :
Under the purview of the SEBI the Central Government of India has set up the Investors Education and
Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the
interest of the small investors from frauds and malpractices in the capital market.
Growth of Derivative Transactions :
Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001 it
also introduced the future and options transactions. These innovative products have given variety for
the investment leading to the expansion of the capital market.
Insurance Sector Reforms :
Indian insurance sector has also witnessed massive reforms in last few years. The Insurance
Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the
private insurance firms in India. As many insurance companies invest their money in the capital
market, it has expanded.
Commodity Trading :
Along with the trading of ordinary securities, the trading in commodities is also recently
encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such
transactions is growing at a splendid rate.

30.
• Establishment of Creditors Rating Agencies :
Three creditors rating agencies viz. The Credit Rating Information Services of India
Limited (CRISIL - 1988), the Investment Information and Credit
Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and
Research Limited (CARE) were set up in order to assess the financial
health of different financial institutions and agencies related to the stock market activities.
It is a guide for the investors also in evaluating the risk of their investments.
• Rising Electronic Transactions :
Due to technological development in the last few years. The physical transaction with more
paper work is reduced. Now paperless transactions are increasing at a rapid rate. It saves
money, time and energy of investors. Thus it has made investing safer and hassle free
encouraging more people to join the capital market.

31.
Secondary Market
The secondary market is that market in which the buying and selling of the
previously issued securities is done. The transactions of the secondary market are
generally done through the medium of stock exchange. The chief purpose of the
secondary market is to create liquidity in securities.
If an individual has bought some security and he now
wants to sell it, he can do so through the medium of stock exchange. to sell or
purchase through the medium of stock exchange requires the services of the
broker presently, their are 24 stock exchange in India

32.
 Definition: This is the market wherein the trading of securities is done.
Secondary market consists of both equity as well as debt markets.
 Securities issued by a company for the first time are offered to the public in
the primary market. Once the IPO is done and the stock is listed, they are
traded in the secondary market. The main difference between the two is that
in the primary market, an investor gets securities directly from the company
through IPOs, while in the secondary market, one purchases securities from
other investors willing to sell the same.
Equity shares, bonds, preference shares, treasury bills, debentures, etc. are
some of the key products available in a secondary market. SEBI is the
regulator of the same.

33.
Features of Secondary Market
 A market for securities- It is a wholesome market where securities of government,
corporate companies, semi-government companies are bought and sold.
 Second-hand securities- It associates with bonds, shares that have already been announced
by the company once previously.
 Regulate trade in securities- The exchange does not sell and buy bonds and shares on its
own account. The broker or exchange members do the trade on the company’s behalf.
 Dealings only in registered securities- Only listed securities recorded in the exchange
office can be traded.
 Transaction- Only through authorised brokers and members the transaction for securities
can be made.
 Recognition- It requires to be recognised by the central government.
 Measuring device- It develops and indicates the growth and security of a business in the
index of a stock exchange.
 Operates as per rules– All the security dealings at the stock exchange are controlled by
exchange rules and regulations and SEBI guidelines.

34.
Limitations of the Secondary Market?
 The prices of securities in a secondary market are subject to high volatility.
Price fluctuations may lead to sudden or unpredictable losses for investors.
 Buying and selling in a secondary market can be time consuming. Investors
have to deal with the tedious paperwork involved before completing final
transactions.
 Investors must be careful with their brokerage commissions because they are
taxed every time the trade is made. Commissions can have a huge impact on
investors and may even dent your profit margin if you’re not paying attention.
 Multiple external factors influence the investments in a secondary capital
market thereby subjecting them to high risk. These may lead investors’
existing valuations to change rapidly within seconds.

35.
 A stock exchange is a place where securities, shares, bonds and other financial
instruments are listed and bought and sold by traders or brokers. To be able to
trade on a stock exchange, securities must be listed on it. Stock exchanges help
companies to raise funds. Therefore the company needs to list themselves in the
stock exchange.
 The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an
"association, organization or body of individuals, whether incorporated or not,
established for the purpose of assisting, regulating and controlling business of
buying, selling and dealing in Securities".
 The securities include:
 (i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of
a like nature in or of any incorporated company or other body corporate;
 (ii) Government securities; and
 (iii) Rights or interest in securities.
Stock exchange

36.
 A stock exchange is a floor or platform which hosts a market where buyers
and sellers come together to trade stocks during specific hours of business
days.
Stock exchange in India
 There are 23 stock exchanges in India. Among them,
 two are national-level stock exchanges namely
1. Bombay Stock exchange (BSE)
2. National Stock Exchange (NSE).
The rest 21 are Regional Stock Exchanges (RSEs).

37.
BSE (BOMBAY STOCK EXCHANGE
 Established in 1875, BSE (formerly known as Bombay Stock Exchange), is Asia's first & the Fastest Stock Exchange in world
with the speed of 6 micro seconds and one of India's leading exchange groups. Over the past 143 years, BSE has facilitated
the growth of the Indian corporate sector by providing it an efficient capital-raising platform. Popularly known as BSE, the
bourse was established as ‘The Native Share & Stock Brokers' Association’ in 1875. In 2017 BSE become the 1st listed stock
exchange of India.
Today BSE provides an efficient and transparent market for trading in equity, currencies, debt instruments, derivatives,
mutual funds. BSE SME is India’s largest SME platform which has listed over 250 companies and continues to grow at a steady
pace. BSE StAR MF is India’s largest online mutual fund platform which process over 27 lakh transactions per month and adds
almost 2 lakh new SIPs ever month. BSE Bond, the transparent and efficient electronic book mechanism process for private
placement of debt securities, is the market leader with more than Rs 2.09 lakh crore of fund raising from 530 issuances. (F.Y.
2017-2018).
Keeping in line with the vision of Shri Narendra Modi, Hon’be Prime Minister of India, BSE has launched India INX, India's 1st
international exchange, located at GIFT CITY IFSC in Ahmedabad.
Indian Clearing Corporation Limited, a wholly owned subsidiary of BSE, acts as the central counterparty to all trades
executed on the BSE trading platform and provides full novation, guaranteeing the settlement of all bonafide trades
executed.
BSE Institute Ltd, another fully owned subsidiary of BSE runs one of the most respected capital market educational institutes
in the country.
BSE has also launched BSE Sammaan, the CSR exchange, is a 1st of its kind initiative which aims to connect corporate with
verified NGOs
BSE's popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock market benchmark index. It is traded
internationally on the EUREX as well as leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa)

38.
NSE (NATIONAL STOCK EXCHANGE
 The National Stock Exchange (NSE) is the leading stock exchange in India and the fourth
largest in the world by equity trading volume in 2015, according to World Federation of
Exchanges (WFE). NSE was the first exchange in India to implement electronic or screen-
based trading. It began operations in 1994 and is ranked as the largest stock exchange in
India in terms of total and average daily turnover for equity shares every year since 1995,
[based on SEBI data].
NSE has a fully-integrated business model comprising our exchange listings, trading
services, clearing and settlement services, indices, market data feeds, technology solutions
and financial education offerings. NSE also oversees compliance by trading and clearing
members with the rules and regulations of the exchange.
NSE is a pioneer in technology and ensures the reliability and performance of its systems
through a culture of innovation and investment in technology. NSE believes that the scale
and breadth of its products and services, sustained leadership positions across multiple asset
classes in India and globally enable it to be highly reactive to market demands and changes
and deliver innovation in both trading and non-trading businesses to provide high-quality
data and services to market participants and clients.

39.
Functions of Stock Exchange
 Role of an Economic Barometer: Stock exchange serves as an economic barometer that is
indicative of the state of the economy. It records all the major and minor changes in the
share prices. It is rightly said to be the pulse of the economy, which reflects the state of the
economy.
 Valuation of Securities: Stock market helps in the valuation of securities based on the
factors of supply and demand. The securities offered by companies that are profitable and
growth-oriented tend to be valued higher. Valuation of securities helps creditors, investors
and government in performing their respective functions.
 Transactional Safety: Transactional safety is ensured as the securities that are traded in the
stock exchange are listed, and the listing of securities is done after verifying the company’s
position. All companies listed have to adhere to the rules and regulations as laid out by the
governing body.
 Contributor to Economic Growth: Stock exchange offers a platform for trading of securities
of the various companies. This process of trading involves continuous disinvestment and
reinvestment, which offers opportunities for capital formation and subsequently, growth of
the economy.
 Making the public aware of equity investment: Stock exchange helps in providing
information about investing in equity markets and by rolling out new issues to encourage
people to invest in securities.

40.
 Offers scope for speculation: By permitting healthy speculation of the traded
securities, the stock exchange ensures demand and supply of securities and
liquidity.
 Facilitates liquidity: The most important role of the stock exchange is in ensuring
a ready platform for the sale and purchase of securities. This gives investors the
confidence that the existing investments can be converted into cash, or in other
words, stock exchange offers liquidity in terms of investment.
 Better Capital Allocation: Profit-making companies will have their shares traded
actively, and so such companies are able to raise fresh capital from the equity
market. Stock market helps in better allocation of capital for the investors so that
maximum profit can be earned.
 Encourages investment and savings: Stock market serves as an important source
of investment in various securities which offer greater returns. Investing in the
stock market makes for a better investment option than gold and silver.

41.
Trading Procedure on a Stock Exchange
 Selection of the broker: The first and the foremost step in the trading procedure on a stock
exchange is selecting and choosing the right broker who must be a member of the stock
exchange.
 Placing the order: After selecting a broker for the trading, the next step is to place the order.
The investors may specify the number and type of securities that he/she wants to trade.
 Executing the order: After the order has been placed to the broker by the investor, the
broker will then buy or sell the securities as per the instructions and information given by the
investor.
 Settlement: After the execution of the order by the broker, the transactions are carried out
accordingly. It can be carried out either on a cash basis or carryover basis. The amount of
time during which transactions are carried forward is referred to as accounts ranging from
one quarter to one month. All transactions made in the course of a single account shall be
resolved by payment for sales and by the issuance of share certificates, which is evidence of
the individual’s ownership of the securities.