UPSC and PCS Study Notes: Capital Market

Financial Market is the market where borrowing and lending of funds of all individual, institutions, companies and of the government take place. In India, Financial Market can be divided into two main categories-(A) Money Market (B) Capital Market. In this article, we will read the "Basics of Capital market, Stock market, their types, and features"

Money Market

It is used for short-term credit.
Generally, we use it for borrowing and lending of money up to 1 year.
It includes Reserve Bank of India, Commercial Banks, Cooperative Banks, Regional Rural Banks, Some NBFC’s etc.

Capital Market

It is used for long-term credit.
Generally, we use it for borrowing and lending of money above 1 year.
It includes Stock exchanges, Housing finance companies, Insurance companies etc.
All the institutions listed in the capital market are called Non-banking financial companies (NBFC’s). But it is not Necessary that all NBFCs are the part of the capital market.
NBFCs
NBFCs is a company registered under the companies act, 1956. It differs from banks in the following aspects-
(i) It cannot accept demand deposits.
(ii) They do not have insurance coverage on their deposits however bank deposits have insurance cover of Deposit Insurance and Credit Guarantee Corporation.

Composition of Capital Market

It is mainly divided into three categories-
(A) Securities Market
(B) Development Financial Institutions
(c) Financial Intermediaries

(A) Securities Market

It deals with shares and debt instruments. These instruments are used for fund-raising.
In shares instrument, we include equity share, preference share, derivatives etc. In these instruments, investors have a partner in the capital, profit and loss.
In a debt instrument, we include bonds (corporate bonds, government bonds; also read Bharat Bonds ETFs), debentures etc. In these instruments, we need to pay interest to the debt instrument holder regardless of profit or loss.
Debentures- In this lender lends money to companies with some surety (maybe Plant, machinery etc). But in case of Bonds lender lends money to the companies without any surety.
Shares are mainly of two types- the First one is equity share and the second one is preference share. In equity shares holder has claimed over the capital, profit and loss. In Preference shares holder is entitled to have a fixed amount of dividend. In case of the closing of company preference shareholders have the preferential right to get back the capital paid.
For trading of securities, we have primary (New issue) and secondary (Old Issue) market.

Primary (New Issue Market)

In this, securities issued by the issuer and purchased by Public. Purchase of new or fresh securities is carried in this.
In the primary market, if any company issues share for the first time, it is called as the Initial Public offering (IPO).
If any company that has already issued shares, they again issue shares to raise additional fund it is known as Follow-on Public Offering (FPO).

Secondary (Old Issue Market)

Buying and selling of securities which are already issued in New issue (Primary) market.
There are two platforms for the trading in this market which are-
(1) Stock Exchanges (Only listed securities), (2) Over the Counter Exchanges (Securities which are not listed on any stock exchange)

Terms used in the securities market

Declared Price Issue- Fixed price
Book Building Issue- Price fixes according to demand
Merchant Banker- Issuer appoints it on behalf of it to carry out fund-raising activities
Authorised Capital- Maximum amount authorized by higher officials of the company that can be raised by the company
Issuer Capital- Actual amount issued by the company
Subscriber Capital- Actual amount subscribed by the public
Underwriter- It is a financial intermediary who promises to purchase of Unsubscribe capital.
Called up Capital- Company collects the fund in instalments and portion of money called from Subscriber is called as Called up Capital.
Paid up Capital- the Actual amount paid by subscribers
Reserve Capital- Un-demanded of money portion
Right Issue- In this offer of securities to existing shareholder via FPO.
Bonus Issue- the issue of shares as against a profit of existing shares
Sweat Equity Issue- Offer of shares to employees against their hard work for the company
Cash trading- Sale and purchase of securities on the price of the trading day
Forward trading- Both buyer and seller signed an agreement to repurchase of securities on pre-agreed price.
Derivatives- It does not have independent value, it has value only because of underlying securities which need to be traded.
Demutualisation- Process of transferring of share from brokers to Public

Stock Exchanges

There are two important stock exchanges in India- NSE and BSE.

National Stock Exchanges (NSE)

It was established on the recommendation of Pherwani Committee in 1992.
Nifty and Nifty Junior are the indices of NSE. Nifty measures share price of top 50 and later top 50 by Nifty junior.

Bombay Stock Exchanges (BSE)

It is Asia’s oldest stock exchange and was established in 1875.
SENSEX (Sensitive Index) is the Index of BSE. SENSEX measures share price movement of top 30 companies.

Depositaries

In this Investors keep their securities in Demat (Dematerialised) form. Currently, there are two depositories in India.
(1) NSDL (National Securities Depository Limited)- It is located in Mumbai.
(2) CDSL (Central Depository Services Limited)- It is also located in Mumbai.

(B) Development Financial Institutions

They provide a long-term loan, entrepreneurial assistance (technical advice etc).
Examples of these are- IDBI, EXIM bank etc.

(C) Financial Intermediaries

RBI regulated
(1) Asset Finance company
(2) Loan Company
(3) Investment Company
SEBI regulated
(1) Venture Capital Fund
(2) Merchant Banking Companies
(3) Stock Broking Companies

UPSC and PCS Study Notes: Capital Market