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September 01, 2017

Banking Awareness in Simple Language - Lesson 24

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Dear Gr8 Ambitionists, in our previous Banking Awareness Lesson 23, we have learnt about Bank Risks & Risk Management. In today's lesson, we shall learn Capital Market. Happy Reading :)

Banking Awareness 2017 : Capital Market


The capital market is one of the types of Financial Market. So, before going to learn about Capital Markets, let's see what are Financial Markets

Financial Markets


The financial system of a country is a combination of financial markets. A financial market is a market that brings buyers and sellers together to trade in financial assets such as stocks, bonds, commodities, derivatives and currencies. The purpose of a financial market is to set prices for global trade, raise capital, and transfer liquidity and risk. Although there are many components to a financial market, three of the most commonly used are :
  • Capital markets, 
  • Commodity markets and 
  • Money markets
Today we shall learn about Capital Market. 

Capital Market

Capital markets are markets for buying and selling equity and debt instruments. These markets are also known as "Securities Market". Capital market refers to facilities & institution arrangements through which long-term funds, both debt and equity are raised and invested. The capital market consists of development banks, commercial banks, and stock exchanges.

Capital market can be divided into two types. They are :
  • Primary Market
  • Secondary Market

Primary Market :

It is also known as the new issues market. It deals with the new securities being issued for the first time. The functions of primary market is to facilitate the transfer of investable funds savers to entrepreneurs seeking to establish new enterprise or to expand existing ones through the issue of securities for the first time. 
  • IPO (Initial Public Offering) : IPO or stock market launch is a type of public offering in which shares of a company are usually sold to institutional investors that in term, sell to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. 
    • Note : 1st modern IPO was issued by DUTCH EAST INDIA COMPANY in March 1602.
  • FPO (Follow on Public Offer) : FPO is a process by which a company (listened on an exchange) issues new shares to the investors or the existing shareholders, usually to promoters. FPO is used to diversify the equity based, by the companies. 

Secondary Market :

The secondary market is also known as the "Stock market or Stock exchange".  It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market. It also provides liquidity & marketability to existing securities.

Stock Market :

Stock market or equity market is the aggregation of buyers & sellers of stocks (also called shares)

Functions of Stock Market :
  • Providing liquidity & market ability to existing securities.
  • Pricing of securities.
  • Safety of transaction.
  • Contribution to economic growth.
  • Providing scope for speculation. 

Stock Exchange :

It is an exchange or stock market where stock brokers and traders can buy or sell stocks (also called shares), bonds & other securities. 

Note : Bear & Bull terms are used in share market. 

Stock Exchanges in India :

The major stock exchanges maintained by SEBI are :
  • BSE (Bombay Stock Exchange)
  • NSE (National Stock Exchange)

BSE :

It is an Indian stock exchange located in Mumbai, established in 1875. The BSE is considered to be one of Asia's fastest stock exchanges, with a speed of 200 microseconds and one of India's leading exchange groups & the Oldest Stock exchange in the South Asian region

More than 5000 companies are listed on BSE.

Important Note : BSE is the world's 11th largest stock market. 

NSE :
It is the leading stock exchange of India located in Mumbai, established in 1992 as the first demutualized electronic exchange in the country to provide a modern, fully automated screenbased electronic trading system.

NSE has a market capitalization of more than US $ 1.65 trillion. 

Important Note : NSE is the world's 12th largest stock exchange.

BSE Sensex :

The S & P BSE Sensex (S & P Bombay Stock Exchange Sensitive Index) also called the BSE 30 or simply the SENSEX, is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange.

On 25th July 2001 BSE launched DOLLEX-30, a dollar linked version of S & P BSE SENSEX. The index is calculated based on a free float capitalization method.

CNX Nifty :

The CNS Nifty also called the NIFTY 50 or simply the Nifty. is National Stock Exchange of India's benchmark stock market index for Indian equity market. This was launched on 21st April 1996. Nifty is owned and managed by India Index Services and products (IISL), which is a wholly owned subsidiary of hte NSE strategic investment corp ltd. IISL had a marketing and licensing agreement with standard & poors for co-branding equity indices until 2013. 
The 'CNX' in the name stands for 'CRISIL NSE INDEX'.

The CNS Nifty Index is a free float market capitalization weighted Index. It is developed by Ajay Shah & Susan Thomas. 

Capital Market Instruments in India

Shares 

Shares are a unit of ownership in an organization or corporation. It is a part of the company's capital. Those individuals who are getting shares from any company are called shareholders. There are two types of shares. They are :
  • Equity Shares
  • Preference Shares
Company provide profit to their shareholders. 

Bonds 
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is debt security, under which the issuer owes the holders a debt & depending on the terms of the bond, is obliged to pay them interest (the coupon) and to repay the principal at a later date, termed the maturity date. 
Interest is usually payable at fixed intervals (annual, semi-annual, sometimes monthly). Very often the bond is negotiable i.e., the ownership of the instrument can be transferred in the secondary market. 

Important Notes :
  • The holder of the bond is the lender (creditor)
  • The issuer of the bond is the borrower (debtor)
The coupon is the interest
  • US Treasuries : These are the safest bonds of all because the interest & principal payments are guaranteed by U.S. govt. 
    • Interest is exempt from state and local taxes, but not from federal tax.  
  • Note : First ever bond issued by a national govt was issued by Bank of England in 1694.

Debenture 

In corporate finance, a debenture is a medium to long term debt instrument used by large companies to borrow money at a fixed rate of interest from public. 

There are two types of debentures :
  • Convertible debentures
  • Non - Convertible debentures
Convertible Debentures :
Which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. 

Non - Convertible Debentures :

Which are simply regular debentures cannot be converted into equity shares of the liable company. 

Fixed Deposit 

It is that kind of bank a/c, where the amount of deposits is fixed for specified period of time. The main purpose of account holders to open this a/c, is to earn interest money from their actual money, which to given by the banks during a specified period of time.

FDI (Foreign Direct Investment)

In FDI a business enterprise of one county invests in another country.

FDI is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments.

FDI is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "Control".

FII (Foreign Institutional Investors)

Institutional Investors is a term for entities which pool money to purchase securities, real property & other investment assets or originate loans. Institutional Investors include banks, insurance companies, pensions, hedge funds, investment advisors, endowment and mutual funds.

When considered from a strictly local standpoint, institutional investors are sometimes called FIIs. 

In countries like India, statutory agencies like the SEBI have prescribed norms to register FIIs & also to regulate such investments flowing in through FIIs. In 2008, FIIs represented the largest institution investment category with as estimated US $ 751.14 billion.

P-Notes (Participatory Notes)

P-Notes are not used within the country. They are used outside India for making investments in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments
Participatory notes commonly known as P-notes or PNs are instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian Stock Market without registering themselves with the market regulator, the SEBI. 
Important Note : SEBI permitted FII to register & participate in the Indian stock market in 1992.

PNs are also known as Overseas Derivative Instruments, Euity linked notes, capped return notes, Participating Return notes etc.

That's all for now friends. In our next Banking Awareness lesson, we shall learn about Money Market. Happy Reading :)
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1 comment:

  1. please post basel accords. previous also i asked but you not posted post on basel norms please post

    ReplyDelete