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Supply of money capitol
IndividualsCorporationsInstitutions
BanksGovernment
Buyers of money capitol
IndividualsCorporationsInstitutions
BanksGovernment
Investors/lenders/sellers of money capitol
borrowers
• NEW ISSUE MARKET• STOCK MARKET
• FINANCIAL INSTITUTIONS
WHAT IS CAPITAL MARKET ????LONG TERM
LOANSWealth in the form of money or property owned by a person or business…
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Constituents of capital market
Lender’s sector
Borrower’s sector
organized unorganized
Stock exchange
NBFI
Corporate security market
Government security market or gilt edged security
New issue market
Secondary market
Chit funds Money lenders
Development banks
Investment institutions
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Shows his records to investment banker
Registered with SEBI
THEN THE INVESTMENT BANKER PAYS HIM $3MILLION ……and the banker will sells the company’s share…..thus acting as a UNDERWRITER
ORGANISATION OF NEW ISSUES(investigation of viability and prospects of new projects----technical and resource evaluation)
UNDERWRITING OF NEW ISSUES
[Guaranteeing purchase of a specified amount of new issue at a fixed price]
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DISTRIBUTION OF NEW ISSUE
PUBLIC ISSUE BY PROSPECTUS
• INVITATION TO PUBLIC
• DONE THROUGH ADVERTISEMENT
PRIVATE PLACEMENT BY UNDISTRIBUTED
SYSTEM
• SOLD TO BIG INDUSTRIAL INSTITUTIONS OR ISSUE HOUSES
• THEY SELL THEIR SHARES TO THEIR CONSUMERS I.E. SOME SELECTED FIRMS /COMPANIES
RIGHT ISSUE
• OLD COMPANIES SELL THE SHARE OF ITS SHARE HOLDERS
• PROPOSES TO BUY NEW SHARES IN PROPORTION OF THEIR OLD SHARES AT LESS THEN M.P
TENDER METHOD / OFFER FOR SALE / BONUS ISSUE [Bidding] [issue houses]
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Stockholders elect the directors of the corporation
Directors determine the dividend to be paid out of the earning
Income statementRs.200
Balance sheetRs.70
EARNING PER SHARE
To sell at Rs.1000 =M.P of the company
Divided company into 100 pieces
Shares outstanding
1 piece –Rs. 10 M.P per share
CASH FLOW STATEMENTS
profit
Left after bankruptcy
Book valueBalance sheet per share [Equity ]
E P SR s . 2
P.E of business = P/E =M.P/EPS = 10/2 = 5 ………
MARGIN OF SAFETY = difference between equity and M.P
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2 ways company can raise capital
Borrow money Selling shares
DEBT EQUITY
BONDS STOCKSecurity in
Ownership interest of shareholders in a corporation
ASSETS
DEBT [Rs.6000]
SHARES [Rs.4000]
Rs.10,000
40 share certificates [1 share =Rs.100]
60 bond certificates [ face value/par value = Rs.100]
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Classification of corporate securities
Ownership securities
EQUITY SHARES
PREFERENCE
SHARES
DEFERRED
SHARES
NO PAR STOCK
Creditorship securities
DEBENTURES
[Bonds]
PRIMARY MARKET OR NEW ISSUE MARKET
neNew securities that have never been previously issued are offered
Earlier—issued to promoters or founder for services Having no face value… dividend is
paid per share
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ORDINARY /EQUITY SHARES
PREFERENCE SHARES
DEBENTURES/BONDS
MATURITY permanent capitalCan’t be redeemed
Irredeemable[no pay off] **
Redeemable **[mature at a time]
CLAIM ON INCOME
‘variable income security’…cannot legally force…..
Prior claim on income over equity shares **
legal obligation to pay income on due date
CLAIM ON ASSETS
Residual claim No right in surplus assets
No share in surplus assets
CONTROL Each equity share=1 vote
No voting rights No control over management
CALL FEATURE no Yes [may buy back] yes
OTHER FEATURES
Limited liabilityCannot be held for further losses ….enjoys ownership without risks
Hybrid form of security
Creditors of the company
Pre-emptive right can issue right shares….shares must be offered to existing shareholders ..
[Entitles a company to redeem its securities before maturity]
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U will be given Rs.100 + r% on maturity…or if the company goes bankrupt
Bond holder
shareholders
bankruptcyCan’t pay off debt
People want to liquidate assets
BOND VS INTEREST RATE [r%]
If r% Bond priceOr face value
Buys at 10%For Rs. 1000
r% inc to 15%
Wants to sell before maturity
People will buy from him but at Price < 1000
So this bond will be traded at a discount to par
If r% dec to 5% Bond will be traded at
Premium to par
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Substantial assets, plants tools ,equipment ,cash
Broad distribution of shares among large no. of shareholders
Examination of financial health
Annual net earning at times of listing of ……
Finally it’s listed and made public.Each time ODM stock is traded , the price, no. of shares traded etc. flashes ……
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Ram from ‘place A’ decides to invest in 100 shares
‘Place A’ broker wires his order to NY office
The buy order is telephoned to floor of NY stock exchange
It’s given to firm’s floor partner who becomes
Representative of buyer Ram
He goes to floor where stock is traded and bids $ 10 a share
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The ‘place B’ broker wires the sell order to his firm’s representative on floor of NSE
Needs money
•STOCK EXCHANGE organization for buying and selling of listed existing shares [organized market]
•OVER THE COUNTER EXCHANGESecurities that are not listed on an organized stock exchange
Shares of small companies
Limited market
Direct negotiations between stock brokers
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seller buyer
Owner of 1 share JNJ…….wants to sell it for $65
Stop order
Wants to own I share of JNJ…
Stop order for
$64
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Limit order –when someone is willing to buy it for $65 or more…
Limit order-when someone is willing to sell it for $64 0r less
People don’t want to sell less then what they could make of
People don’t want to buy more than they had to pay for
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sellers buyers
Stop order $64
Stop order $65
Wants to own 1 share of JNJ market order
Market price is now displayed as $65 a
share
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Does it mean the company is worth $65 a share or did a couple of people traded it for $65 a share?
How M.P is moving up and down----because it’s not majority people determining M.P but a just a few people ….det..it..
Market price
THOUSANDS of orders a day cause
the M.P of the company to move
up and down
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The stock market behaves like a voting machine ,but in the long run it acts like a weighing machine…………..Benjamin Franklin
Short term:Anyone can price the
stock
Long term:The value becomes
absolute
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Instincts
Behavior performed
Without based on
Previous experience
Trading on instincts ------Is emotion based approach
FEAR GREED
value based approach
Knowing true intrinsic value of company
DAY TRADINGe.g.; AMERICAN EAGLE COMPANY
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People are chasing
prices..not value
MINDSET : a quick buck is about to be
madepeople are scared they’ll loose
everything MINDSET : I DON’T KNOW THE VALUE OF THESE STOCKS ,so I
am out of here
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• Owners without loyalty • Sway between greed and fear• A click changes ownership• What matters is money
TRANSIENT INVESTORS Markets run on psychology
Pure finance : 1+1=2
finance + psychology:1+1=10704047
GREED : over confidence and over optimism
FEAR : aversion and decision paralysis