CAPITAL MARKET

CAPITAL MARKET

Capital market is the place where transactions related to sale/purchase of shares and various other securities are carried out. It is also known as  stock market, equity market, share market or long term debt market.

WHAT IS CAPITAL

It is the amount of funds invested by a person or a group of persons or a company / any business entity to start a business / venture. Thus, money invested by person to start a Kiryana Shop or money invested by a compnay to start a Factory are example of capital.

As per the Companies Act, 2013, only public limited companies are authorized to raise money from the public for investment in their company. As per recent SEBI guidelines, share holding of public cannot be less than 25% in companies listed on stock exchange.

A company’s capital passes through 4 main stages:

• Authorized Capital: Maximum amount of capital that a company can have. It is mentioned in the Memorandum of the company.
• Issued Capital: Amount of capital that has been issued out of authorized capital.
• Subscribed Capital: Amount of capital from the issued capital that has actually been subscribed by the public.
• Paid up Capital: Amount of capital from the subscribed capital that has been fully paid up.

The companies raise this money in the form of shares issued to the public. Thus, a share is a unit in the capital of the company. Shares issued in this manner can be sold and purchased freely in the capital market as they are freely transferable. Shares have 2 main types:

• Equity shares: Equity shares also called Ordinary shares are issued to the public and rank last in the priority.
• Preference shares: These shares are issued on selective basis. These have fixed rate of dividend payable and get preference over the equity shares and usually do not have voting rights.

All the transactions in share market, including functioning of stock exchanges, are governed under the Securities Contract (Regulation) Act, 1956. 

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

Chairman : Mr. Upendra Kumar Sinha

Formed under SEBI Act, 1992, it is the official regulator and controller of the share market. It authorizes and monitors the functioning of stock exchanges. It also works to develop and improve the functioning of share market. It also acts as a watchdog to protect and promote the interest of investors, particularly small investors.

STOCK EXCHANGE

Stock exchanges are Private corporate bodies offering an organized market for buying and selling of corporate shares and other securities. They act as settlement house for sale / purchase of these securities. Any sale / purchase of shares can be done only through brokers / sub brokers authorized by the stock exchanges.

Ase per recent SEBI guidelines, every stock exchange must have networth of not less than Rs. 100 crore, of which minimum 51% has to be held by public and an annual turnover of not less than 1,000 crore. There are 19 recognized stock exchanges in India. Bombay Stock Exchange is the oldest and the National Stock Exchange is the largest. Established in 1875, BSE is the oldest stock exchange of Asia. 

Prominent stock exchanges maintain an index to indicate the level of turnover in the sale purchase of shares. Index of BSE is “sensitive index” commonly known as ‘Sensex’ and that of NSE as ‘Nifty’. They represent a basket of 30 and 50 shares, respectively. Sensex and Nifty are just proper names and do not have any full form.

Stock Exchange	Index name	No. of shares	Base year	Base Value
BSE	Sensex	30	1978-79	100 (as on 01.04.1979)
NSE	Nifty	50	1995	1000

STEPS IN ISSUING SHARES

PROSPECTUS

Whenever a company plans to issue shares to raise money from the public, first thing that it has to do is to issue an ‘offer document’ called Prospectus. A copy of this has to be filed with SEBI and concerned stock exchange. Prospectus contains all past and future facts / plans of the companies to enable the investor to take a decision about purchase of shares.

RED HERRING PROSECTUS

This type of Prospectus does not provide information about the exact price or the size of the issue. Regarding price, it mentions a range, say, shares will be priced in the range of Rs. 100 to Rs. 150. For numbers, it mentions like, one lakh shares will be issued and company may retain a part of oversubscription.

INITIAL PUBLIC OFFERING (IPO)

When a company issues shares for the first time it is called IPO or its first ‘Public issue’. All subsequent issues of shares are known as FPO (Follow on Public Offering). IPOs and FPOs are managed by Merchant Bankers usually called Issue Manager.

OFFER FOR SALE

Sometimes, existing public ltd. companies where public holding is less than 25% are required to sell their shares to the public to achieve 25% public holding. Such sale is called ‘offer for sale’.

BOOK BUILDING

Book Building is a process through which a demand for a particular share is assessed, usually immediately before an IPO and the price for such share are fixed accordingly. Thus, price at which shares will be allotted is not known in case of book building.

UNDERWRITING

Underwriting is an agreement, entered into by a share issuing company with a financial agency (underwriter) who agrees to buy that part of the shares which are not subscribed to by the public. The underwriter does so in consideration of a specified underwriting commission.

DEMAT ACCOUNT

DEMAT is the short form of De-materialization. In simple words it means, conversion of physical securities into digital for. In recent times, SEBI has made it compulsory to route all sale purchase transactions of shares through DEMAT Accounts only. These accounts are maintained by various banks but they are not banking accounts as they belong to various depositories such as NSDL & CDSL.

NSDL – National Securities Depository Ltd.

CDSL – Central Depository Services Ltd.

APPLICATION SUPPORTED BY BLOCKED AMOUNT (ASBA)

This is the latest mechanism for applying for purchase of shares wherein instead of cheque / draft, the applicant simply has to fill in an application for the required amount and get it certified from is banker that the required amount has been blocked in applicant’s account. Once the shares are allotted, the amount is debited electronically to the applicants account.

As per SEBI guidelines, ASBA is compulsory for all non retail investors (above Rs. 2 Lakh). Also Known as HNI investor (High Networth Individuals)

PRIMARY AND SECONDARY MARKET

Share market has 2 sections – Primary and Secondary. The process of issuance of shares, right from issue of prospectus till closure of issue is part of Primary Market. The players in primary market include share issuing companies, issue managers, underwriters and share applicants. Once the shares are issued, they have to be listed on any stock exchange, after which they are available for sale purchase and become part of Secondary Market. The players in secondary market include stock exchanges, brokers, sub brokers, buyers and sellers.

LISTING

Shares, before being offered to the market need to be listed on stock exchanges for the purpose of trading. Listing implies that the shares have been listed on the stock exchange and are available for trading in the secondary market. The process of listing on the stock exchanges has to be done within 7 days of finalization of issue.

BEARS AND BULLS

These are two distinct types of players in share market. Bears are typically pessimists who think that share prices are likely to fall in near future and therefore they indulge in outright selling of shares. Thus, a bearish market is one where prices are falling. In contrast Bulls are typically optimists who think that share prices are likely to rise in near future and therefore they indulge in outright buying of shares. Thus, a bullish market is one where prices are rising.

DIVIDEND

Dividend refers to a share of a company’s profits that is divided among shareholders in proportion to their share holding. People, who own stocks or mutual funds, may receive dividends from those investments.

The profit made by shareholders due to rise in market price of their shares is called capital appreciation.

RIGHT ISSUE

These are shares issued at a discount to the existing share holders of a company. The share holders have a choice to purchase or not to purchase these shares.

BONUS ISSUE

The companies earning hefty profits may issue free bonus shares to the existing share holders, usually in a fix proportion, say, one free share for every 3 shares held by the investors.

MUTUAL FUNDS

A mutual fund is in the form of a trust that brings together money form many people and invests it in stocks, bonds or other assets.

• The fund brings out a New Fund Offer (NFO) to issue units to the public. The combined holdings of stocks, bonds or other assets that the fund owns are known as its
• This portfolio is managed by an Asset Management Company (AMC) which is controlled and supervised by the
• Mutual funds are considered as one of the best available investments options as compared to others they are very easy to invest and are cost efficient.
• The value of fund’s portfolio at market value less current liabilities divided by the number of units outstanding gives us the Net Asset Value (NAV).
• It is normally computed daily or weekly and can be found in the financial section of the daily newspapers. Mutual fund units are sold and bought at NAV.

As per the recent SEBI regulations, from July 1, 2013, Mutual Funds have been asked to adopt prescribed colour code to indicate the risk level in the proposed fund. The prescribed colour code is as under:

Blue: Low Risk             Yellow: Medium Risk                    Brown: High Risk

Some other terms linked with mutual funds are:

AMFI- Association of Mutual Fund of India

SIP- Systematic Investment Plan

SOME OTHER TERMS LINKED WITH SHARE MARKET

• FPI :                  Foreign Portfolio Investors
• QIB :                 Qualified Institutional Byers – Banks, FIIs etc.
• QIP :                 Qualified Institutional Placements
• ETF :                 Exchange Traded Fund
• EPS :                  Earning Per Share
• PAT/PBT :     Profit After / Before Tax
• PE Ratio :        Price to Earnings Ratio
• ROCE :              Return on Capital Employed
• ESOP :               Employee Stock Ownership Plan
• ADR :                 American Depository Receipts
• GDR :                 Global Depository Receipts
• IDR :                   Indian Depository Receipts
• MIDCAPS :     Companies with middle size capital
• STRIPS :           Separate trading of registered interest and principal securities

Blue Chip Company – Any good financially strong company.

Debentures/ Bonds – Long term loan options with the companies.

Zero Coupon Bonds – Bonds issued at a discount to their face value also known as Deep Discount Bonds.

COMMERCIAL PAPER (CP)

It is a short term unsecured promissory note issued by corporate bodies (Public & Private) to meet short-term requirements of working capital. Maturity varies between 7 days to 1 year.

CERTIFICATE OF DEPOSIT (DC)

It is issued by scheduled commercial banks excluding regional rural banks. These are unsecured promissory notes. Bank CDs have maturity of 7 days to one year.

Gilt Edged Securities – Government Securities or any highly safe securities.

Market Cap – Short form of market capitalization, it is arrived by multiplying total shares of accompany by their market value.

FORWARD TRADING

It is the activity of buying or selling shares, commodities, or foreign exchange for delivery at a later date, usually done through stock exchanges. These transactions are regulated through Forward Market Commission (FMC).

Future, Option and Swap: are 3 types of shares bought and sold in the stock market. Future means trading an instrument in the future, Option give buyers the right to trade security in future and Swaps are derivatives where 2 parties agree to exchange one stream of cash flow with another.

BULLION MARKET

Bullion refers to precious metals in bulk form which are regularly traded on commodity markets. The value of bullion is typically determined by the value of its precious metals content, which is defined by its purity and mass. Common examples of bullion are gold /silver bricks, bars and biscuits.

REDEMPTION

It is the process of refunding an investor’s money, invested as in debentures, bonds or mutual fund units, usually at maturity.

CROWD FUNDING

It is a new innovative process adopted by some upcoming entrepreneurs to raise funds from the public but not through IPO. They put their proposal on social sites like facebook etc. and people contribute to their capital. Such issues are yet to be regularized by the SEBI.

ARBITRAGE

It is the opportunity to buy an asset at a low price then immediately selling it in a different market for a higher price. Arbitrage is commonly practised in share markets where it refers to trading of securities when the opportunity exists during the trading day to take advantage of difference in value at difference times.

HEADGING

It means reducing or controlling risk by taking a position in the futures market that is opposite to the one in the physical market with the objective or reducing or limiting risks associated with price changes. For instance, a wheat farmer can sell wheat futures to protect the value of his crop prior to harvest.

LONDON INTER BANK OFFERED RATE (LIBOR)

It is the most popular barometer for short-term interest rates in the world. It is the interest rate that the most credit-worthy banks around the world charge each other for loans ranging from 24 hours to up to one year. The 2 other similar bench marks are:

SIBOR: – Singapore Inter Bank Offered Rate and MIBOR: – Mumbai Inter Bank Offered Rate.