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CAPITAL MARKET

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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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OIL DRUM MFG.CO.

TO SELL HIS BUSINESS ……TO RAISE CAPITAL…..He needs long term loans …HOW ?

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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

13Expansion of business

To fill more orders he needs more stockholders

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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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This market people trade money for food

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This market people trade money for proportional ownership of real companies

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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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sellers buyers

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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

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