Components of Capital Market
There are 3 components in a capital market:- Equity market
- Debt market
- Derivative market
Tenure of Debt Instruments
Capital market is related to issuing and trading in equity shares. It also deals in medium and long term debt instruments which are bonds and debentures.- Short Term: Tenure less than 1 year
- Medium Term: Tenure more than 1 year up to 3 years
- Long Term: Tenure more than 3 years
2 segments of the equity and debt market
The primary market which deals with the issues of equity and debt instrumentsThe secondary market which deals with trading in equity and debt instruments
This maintains liquidity of the instruments and allows people to participate in the market.
Primary Market
This type of market avails the sale of new securities. It also presents the perfect opportunity to both the government and corporate bodies who issue securities to improve resources so that their requirements related to investments and/or discharge is met. They have the right to issue securities at discount, face value or premium in the domestic or the international market.Types of issues:
- IPO (Initial public offering): Whenever a company makes a new issue of securities of an offer in order to sell the existing securities or both for the very first time to the public an initial public offering is done.
- Further Issue: This issue is a follow on public offering. This offer is executed by means of an offer document when a listed company releases an offer for sale to the public or makes issue of new securities.
- Rights Issue: This is an issue where a listed company releases new securities to its shareholders on a recorded date and is offered in a ratio which is based on the securities held beforehand. This is mainly done to raise capital without diluting the stake of its shareholders.
- Preferential Issue: Shares and convertible securities of listed companies to a particular set of people fall under this issue. It comes under Section81 of the Companies Act 1956. It is neither a public nor a rights issue and is the fastest way for a company to improve capital.
Secondary Market
Trading in equity and long term debt instruments is the feature of the secondary market. It is a place where investors trade among them in pre existing securities. It may be a dealer market of which OTC is a part or even an auction market of which stock exchange is a part.Concepts:
- Corporate Action: Corporate actions include- dividend declaration, bonus shares issue and splitting of shares. As the values of shares are altered it has an impact on the market prices of shares.
- Buyback: Buying back of shares is buying shares from another investor in the market as a motive of investment. This is done to improve liquidity of shares and to enhance wealth.
- Index: It is like an indication as to how the prices of listed stocks in a particular market are going to behave.
- Sensex: It is the index which is related to trading of shares on the Bombay Stock exchange.
- Nifty: It is the index which is related to trading of shares on the National Stock exchange.
