CAPITAL MARKET

 The capital market is the market where corporations or business entities and
governments issue financial assets such as bonds and shares to meet their
medium to long-term financial needs.
 The capital market is a financial market where individuals, institutions, and
governments can buy and sell financial securities, such as stocks, bonds, and other
long-term investments. And the securities are long term in nature (over one year).
 NSE AND BSE are the examples for the capital market in India.

TYPES OF CAPITAL MARKET

There are two types of capital market, primary and secondary market.

1. Primary Market

 The primary market is where securities are issued and traded in public for the
first time.
 The primary capital market, also known as the new issues market. Where securities
are created.
 In this market, companies issue new shares of stocks and bonds to the public for the
first time, such as during an Initial Public Offering (IPO).
 For instance, when a company like Uber decided to go public in 2019, it sold its
shares on the primary market, raising capital to fund its operations.

2. Secondary Market

 The secondary market (second-hand market) is where investors trade securities

first issued on the primary market.

 The secondary market is where investors trade securities previously issued in the
primary market. Essentially, the secondary market provides a platform for the buyers
and sellers of existing securities to interact and make transactions.
 Take the New York Stock Exchange for example, where shares of publicly traded
companies like Apple, Microsoft, or Tesla are bought and sold every day – this is part
of the secondary market.
 Stock exchanges are secondary markets.

CAPITAL MARKET INSTRUMENTS

Capital markets have diverse financial instruments, each having its own role and significance.
When businesses and governments need to raise capital, they issue securities that investors
can purchase. There are three main instruments in the capital market:
  equities (stocks, shares),
 bonds, and
 derivatives

1. EQUITY OR SHARES

 Equities, often referred to as stocks or shares, represent an

ownership stake in a company.
 Investing in equities gives investors a claim on part of the company's
earnings and assets.
 For example, if you own a share of a company like Apple, you
effectively own a tiny fraction of that business.

Types of shares or equity are;

Ordinary shares
These are the most popular type of shares because they shareholders a voting right. While
ordinary shareholders have the highest potential financial gains, they are the last to pay if the
company is to go bankrupt.

Non-voting ordinary shares

These are ordinary shares that don’t give the holder a voting right.

Preference shares
Preference shares carry no voting right though their holders can receive preferential treatment
when it comes to dividends. Preference shareholders often receive a fixed dividend.

Cumulative preference shares

Cumulative preference shares allow the holders to receive the dividend cumulatively. This
means that if a dividend is not paid this year, it will be paid in successive years as long as the
company still makes profits.

Redeemable shares
Redeemable shares are sold on the agreement that the company can buy them back at a later
date. Companies can’t issue redeemable shares alone, they must also issue other non-
redeemable types of shares.
2. BONDS

Bonds are loans that the government or companies issued to fund

their future spending or investment.

Bonds are debt securities. Governments and corporations issue bonds to borrow money from
investors for a specified period. And the issuer promises to repay the bond's face
value upon maturity and often makes periodic interest payments.
The two main types of bonds are corporate bonds and government bonds.

Corporate bonds
Corporate bonds are debt securities issued by a company to raise capital for their financial
needs.

Government bonds
These are bonds with a fixed rate of returns issued by the government to cover its spending or
pay for debts.

It’s generally safer to invest in government bonds than other securities (When you purchase a
government bond, you loan money to the government. The term of your loan is known as the maturity date.
At this date, the government will repay your investment, and you will have earned interest along the way. )
even it is safer they are not risk-free due to interest rates, inflation, or liquidity issues.

3. Derivatives

 Derivatives are financial contracts, set between two or more parties that derive their
value from an underlying asset, group of assets, or benchmark.
 A derivative can trade on an exchange or over-the-counter.
 Prices for derivatives derive from fluctuations in the underlying asset.
 Derivatives are usually leveraged instruments, which increases their potential risks
and rewards.
 Common derivatives include futures contracts, forwards, options, and swaps.
MONEY MARKET

 Money markets are markets that facilitate the trading of short-term financial assets
from one day to a year.

 The assets are highly liquid. This means that they can be converted into cash quickly
without losing value.
 Some examples include treasury bills and commercial bills.
 The money market exists to meet the need for short-term lending and borrowing by
individuals, corporations, or the government.
 The Reserve Bank controls the interest rate of various instruments in the money
market.

MONEY MARKET INSTRUMENTS

Money market instruments are financial instruments that help companies, corporations, and
government bodies to raise short-term debt for their needs. The borrowers meet their short-
term needs at a low cost and the lenders benefit from interest rates and liquidity. Money
market instruments include bonds, treasury bills, certificates of deposit, commercial paper,
etc.

TYPES OF MONEY MARKET INSTRUMENTS

1. Treasury Bills

 The government issues Treasury Bills, commonly known as T Bills, as debt securities
to raise capital.

 These instruments have short-term maturities, typically less than one year,

 The primary objective behind the issuance of Treasury Bills is to meet the
government’s short-term funding requirements.

 The Reserve Bank of India (RBI) issues all these Treasury Bills on behalf of the
Government of India. They serve as a means for the government to raise short-term
funds to meet its financing needs.

 Treasury Bill Return = (Face Value – Purchase Price) / Purchase Price * 100

2. Commercial Bills

 Commercial bills are also called “bills of exchange,” which are used by firms for
financing their working capital.
 Commercial bills are used when the selling of goods takes place on credit. This makes
the buyer liable for paying the amount on a particular date and time. The bill has
shorter validity and might range from 30, 60, and 90 days.
3. Certificate of Deposit

A certificate of deposit (CD) is a savings account that holds a fixed amount of money
for a fixed period of time, such as six months, one year, or five years, and in
exchange, the issuing bank pays interest. When you redeem your CD, you receive the
money you originally invested plus any interest. Certificates of deposit are considered to
be one of the safest savings options.

4. Commercial Paper

 Commercial paper is an unsecured, short-term debt instrument issued by

corporations or companies.
 It's typically used to finance short-term liabilities such as payroll, accounts
payable, and inventories.
 Maturities on commercial paper range from one to 270 days, with an
average of around 30 days.
 Commercial paper is usually issued at a discount from face value
 Promissory note and drafts are the two common commercial papers

5. Call Money

 Call money, also known as money at call, is a short-term financial loan

that is payable immediately, and in full, when the lender demands it.
 Call money does not have to follow a fixed schedule, nor does the lender
have to provide any advance notice of repayment.