Quick Look on Capital Market - Banking Notes

Quick Look on Capital Market - Banking Notes

Dear Readers, This Banking series is specially made for student who are preparing for Bank Exam. We cover exam specific all General awareness topics in the series. In this series we will discuss about Capital Market.

 Quick Look on Capital Market 

Financial 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

Money Market-

  • In this borrowing and lending of funds take place up to 3 years.
  • It is used for short term credit.
  • It includes Reserve Bank of India, Commercial Banks, Cooperative Banks, Regional Rural Banks, Some NBFC’s etc.

Capital Market-

  • In this borrowing and lending of funds take place above 3 years.
  • It is used for long term credit.
  • 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 capital market.
    NBFCs is company registered under the companies act, 1956. It is differed from banks in the following aspects-
    (i) It cannot accept demand deposits.
    (ii) They do not have insurance cover 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 capital, profit and loss.
  • In debt instrument we include bonds, debentures etc. In these instruments, we need to pay interest to debt instrument holder regardless of profit or loss.
  • Debentures- In this lender lends money to companies with some surety (may be Plant, machinery etc). But in case of Bonds lender lends money to the companies without any surety.
  • Shares are mainly of two types- First one is equity share and second one is preference share. In equity shares holder has claim over capital, profit and loss. In Preference shares holder is entitled to have fixed amount of dividend. In case of 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 issuer and purchased by Public. Purchase of new or fresh securities are carried in this.
  • In primary market if any company issues share for the first time, it is called as Initial Public offering (IPO).
  • If any company that has already issued shares, they again issues 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 in any stock exchange)

Terms used in 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 company that can be raised by company
  • Issuer Capital- Actual amount issued by company
  • Subscriber Capital- Actual amount subscribed by public
  • Underwriter- It is a financial intermediary who promises to purchase of Unsubscribe capital.
  • Called up Capital- Company collects the fund in installments and portion of money called from Subscriber is called as Called up Capital.
  • Paid up Capital- 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- issue of shares as against a profit of existing shares
  • Sweat Equity Issue- Offer of shares to employees against their hard work for company
  • Cash trading- Sale and purchase of securities on the price of 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 1993.
  • 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 1887.
  • SENSEX (Sensitive Index) is the Index of BSE. SENSEX measures share price movement of top 30 companies.
In this Investors keep their securities in Demat (De- materialised) 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 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

All the best for your exams..
Team aimsuccess..!!

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