INTRODUCTION

The capital market is the market for securities, where Companies and governments can raise

long-term funds. It is a market in which money is lent for periods longer than a year. A nations
capital market includes such financial as banks, insurance companies, and stock exchange that
channel long-term investment funds to commercial and industrial borrowers. Unlike the money
typically finance fixed investments like those in building and machinery.
The capital market consists of number of individuals and institutions (including the government) that
canalize the supply and demand for long-term capital and claims on capital. The stock exchange,

commercial banks, co-operative banks, saving banks, development banks, insurance companies,
investment trust or companies, etc., are important Components, namely the suppliers of loanable
funds, the borrowers and the Intermediaries who deal with the leader on the one hand and the
Borrowers on the others.

Indian Financial Market consists of the following markets:

Capital Market/ Securities Market
1- Primary capital market
2- Secondary capital market
Debt market

Primarycapitalmarket- A market where new securities are bought and sold for the first
time.
Types of issues in Primary market
1- Initial public offer (IPO) (in case of unlisted company),
2- Follow-on public offer (FPO),
3- Rights offer such that securities are offered to existing shareholders,
4- Preferential issue/ bonus issue/ QIB placement
5- Composite issue that is, mixture of a rights and public offer, or offer for sale (offer

of securities by existing shareholders to the public for subscription).

Secondary Market: In the secondary market the investors buy / sell securities through
stock exchange. Trading of securities on stock exchange results in exchange of money
and securities between the investors. Secondary market provides liquidity to the securities
on the exchange and this activity commences subsequent to the original issue. For
example, having subscribed to the securities of a company, if one wishes to sell the same,
it can be done through the secondary market. Similarly one can also buy the securities of
company from the secondary market. A stock exchange is the single most important
institution in the secondary market for providing a platform to the investors for buying
and selling of securities through its members. In other words, stock exchange is the place
where already issued securities of companies are bought and sold by investors. Thus,
secondary market activity is different from the primary market in which the issuers issue
securities directly to the investors. Traditionally, a stock exchange has been an association
of its members or stock brokers, formed for the purpose of facilitating the buying and
selling of securities by the public and institutions at large and regulating its day to day
operations. Of the however, stock exchange in India now operate with due recognition
from Securities and Exchange Board of India (SEBI) / the Government of India under the
Securities Contract (Regulation) Act, 1956. The stock exchanges are either associations
of persons or are formed as companies. There are 24 recognized stock exchange in India
out of which one has not commenced its operations.

Out of the 23 remaining stock exchanges, currently only on four stock exchanges, the
trading volumes are recorded. Most of regional stock exchanges have formed subsidiary
companies and obtained membership of Bombay stock Exchange, (BSE) or National
Stock Exchange (NSE) or both. Members of these stock exchanges are now working as
sub-brokers of BSE/ NSE brokers. Securities listed on the stock exchange have the
following advantages:
The stock exchange provides a fair market place.
It enhances liquidity.
Their price is determined fairly.
There is continuous reporting of their prices.
Full information is available on the companies.
Rights of investors are protect.

Settlementcycles:
Settlement is the process whereby the trader who has made purchase of scrip makes payment and
the seller selling the scrip delivers the securities. This settlement process is carried out by
Clearing House for the stock exchanges. The Clearing House acts like an intermediary in every
transaction and acts as a seller to all buyers and buyer to all sellers.

Significance of Capital Markets;

A well functioning stock market may help the development process in an economy through the
following channel:
1- Growth of savings,
2- Efficient allocation of investment resources,
3- Better utilization of the existing resources.

In market economy like India, financial market institutions provide the avenue by which
long-term savings are mobilized and channeled into investments. Confidence of the
investors in the market is imperative for the growth and development of the market. For
any stock market, the market Indices is the barometer of its performance and reflects the
prevailing sentiment of the entire economy. Stock index is created to provide investors
with the information regarding the average share price in the stock market. The ups and
downs in the index represent the movement of the equity market. These indices need to
represent the return obtained by typical portfolios in the country. Generally, the stock
price of any company is vulnerable to three types of news:
Company specific
Industry specific
Economy specific
An all share index includes stock from all sectors of the economy and thus cancels
out the stock and sector specific news and event that affect stock prices, (law of
portfolio diversification) and reflect the overall performance of the company/
equity market and the news affecting it.
The most important use of an equity market index is as a benchmark for a
portfolio of stocks. All diversified portfolios, belonging either to retail investors or mutual
funds, use the common stock index as yardstick for their returns. Indices are useful in
modern financial application of derivatives.

Capital Market Instruments some of the capital market instruments are:

Equity
Preferences shares
Debentures/ Bonds
ADRs/ GDRs
Derivatives

Shares:
The total capital of a company may be divided into small units called shares. For example, if the
required capital of a company is US $5,00,000 and is divided into 50,000 units of Us $10 each,
unit is called a share of face value US $10. A share may be of any face value depending upon the

capital required and the number of shares into which it is divided. The holders of the shares are
called share holders. The shares can be purchased or sold only in integral multiples. Equity
shares signify ownership in a corporation and represent claim over the financial assets and
earnings of the corporation. Shareholders enjoy voting rights and the right to receive dividends;
however in case of liquidation they will receive residual, after all the creditors of the company
are settled in full. A company may invite investors to subscribe for the shares by the way of:

Public issues through prospectus

Tender/ book building process
Offer for sale
Placement method
Rights issue

Stocks
The word stock refers to the old English law tradition where a share in capital of the company
was not divided into shares of fixed denomination but was issued as chunk. This concept is no
more prevalent, but the word stock continues. The word joint stock companies also refers to
this tradition.

Debentures/ Bonds
The term Debentures is derived from the word debere which means to owe a debt. A
debenture is an acknowledgment of debt, taken either from the public or a particular source. A
debenture may be viewed as a loan, represented as marketable security. The word bond may be
used interchangeably with debentures. Debt instruments with maturity more than 5 year are
called bonds.

Yields
Most common method of calculating the yields on debt instrument is the yield to maturity
the formula is as under: YTM = coupon rate + prorated discount / (face value + purchase price)/2

Preference shares

Preference shares are different from ordinary equity shares. Preference share holders have the
following preferential rights
1. The right to get a fixed rate of dividend before the payment of dividend to the equity
holders.
2. The right to get back their capital before the equity holders in case of winding up of the
company.

IPO
Conditions for IPO: (all conditions listed below to be satisfied)
Net tangible assets of 3crore in each of the preceding 3 full years, of which not more than
50% are held in monetary assets:

Track record of distributable profits for 3 out of the immediately preceding 5 years:
Issue size of proposed issue + all previous issues made in the same financial year does
not exceed 5 times its pre-issue net worth as per the audited balance sheet of the
preceding financial year;

In case of change of name within the last one year, 50% of the revenue for the preceding
1 full year earned by it form the activity indicated by the new name.

Derivatives
A derivative picks a risk or volatility in a financial asset, transaction, market rate, or
contingency, and create a product the value of which will change in the underlying risk or
volatility. The idea is that someone may either try to safeguard against such risk (hedging), or
someone may the risk, or may engage in a trade on the derivative, based on the view that they
want to execute. The risk that a derivative intends to trade is called underlying. A derivative is a
financial instrument, whose value depends on the values of basic underlying variable. In the
sense, derivative is a financial instrument that offers return id derived from another instrument.
The best way will be take example of uncertainties and the derivatives that can be structured
around the same

Stock prices are uncertain Lot of forwards, options or futures contracts are based on
movements in prices of individual stocks or groups of stocks.

Prices of commodities are uncertain There are forwards, futures and options on
commodities.

Interest rates are uncertain There are interest rate swaps and future.

Foreign exchange rates are uncertain There are exchange rate derivatives.

Weather is uncertain There are weather derivatives, and so on.

DERIVATIVES PRODUCTS
Some significant derivatives that are of interest to us are depicted in the accompanying graph:
Major types of derivatives.

FUTURES, FORWARDS AND OPTIONS

An option is different from futures in several ways. At practical level, the option buyer faces an
interesting situation. He pays for the options in full at the time it is purchased. After this, he only
has an upside. There is no possibility of the options position generating any further losses to him.
This is different from futures, where one is free to enter, but can generate huge losses. This
characteristic makes options attractive to many market participants who trade occasionally, who
cannot put in the time to closely monitor their futures position. Buying put options is like buying
insurance. To buy a put option on Nifty is to buy insurance which reimburses the full amount to
which Nifty drops below the strike price of the put option. This is attractive to traders, and to
mutual funds creating guaranteed return products.

FORWARDS
A forward contract is an agreement to buy or sell an asset on a specified date for a specified
price. One of the parties to the contract assumes a long position and agrees to buy the underlying
asset on a certain specified future date for a certain specified price. The other party assumes a
short position and agrees to sell the asset on the same date for the same price, other contract

details like delivery date, price and quantity are negotiated bilaterally by the parties to the
contract. The forward contracts are normally traded outside the exchange.

FUTURES
Futures contract is a standardized transaction taking place on the futures exchange. Futures
market was designed to solve the problems that exist in forward market. A futures contract is an
agreement between two parties, to buy or sell an asset at a certain time in the future at a certain
price, but unlike forward contracts, the futures contracts are standardized and exchange traded To
facilitate liquidity in the futures contracts, the exchange specifies certain standard quantity and
quality of the underlying instrument that can be delivered, and a standard time for such a
settlement. Futures exchange has a division or subsidiary called a clearing house that performs
the specific responsibilities of paying and collecting daily gains and losses as well as
guaranteeing performance of one party to other. A futures' contract can be offset prior to maturity
by entering into an equal and opposite transaction. The standardized items in a futures contract
are:
1. Quantity of the underlying.
2. Quality of the underlying.
3. The date and month of delivery.
4. The units of price quotation and minimum price change.

OPTIONS
An option is a contract, or a provision of a contract, that gives one party (the option holder) the
right, but not the obligation, to perform a specified transaction with another party (the option
issuer or option writer) according to the specified terms. The owner of a property might sell
another party an option to purchase the property any time during the next three months at a
specified price. For every buyer of an option there must be a seller. The seller is often referred to
as the writer. As with futures, options are brought into existence by being traded, if none is
traded, none exists; conversely, there is no limit to the number of option contracts that can be in

existence at any time. As with futures, the process of closing out options positions will cause
contracts to cease to exist, diminishing the total number. Thus an option is the right to buy or sell
a specified amount of a financial instrument at a pre-arranged price on or before a particular date.
There are two options which can be exercised:
1. Call option, the right to buy is referred to as a call option.
2. Put option, the right to sell is referred as a put option.

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors. Some of the factors which influence capital
market are as follows:-

A)Performance of domestic companies:

The performance of the companiesor rather corporate earnings is one of the factors which has
direct impact or effect on capital market in a country. Weak corporate earnings indicate that
the demand for goods and services in the economy is less due to slow growth in per capita

income ofpeople. Because of slow growth in demand there is slow growth in employment
which means slow growth in demand in the near future. Thus weak corporate earnings
indicate average or not so good prospects for the economy as a whole in the near term. In
such a scenario the investors (both domestic as well as foreign) would be wary to invest in
the capital market and thus there is bear market like situation. The opposite case of it would
be robust corporate earnings and its positive impact on the capital market.

B) Environmental Factor:
Environmental Factor in India context primarily means- Monsoon. In India around 60 % of
agricultural production is dependent on monsoon. Thus there is heavy dependence on monsoon.
The major chunk of agricultural production comes from the states of Punjab, Haryana & Uttar
Pradesh. Thus deficient or delayed monsoon in this part of the country would directly affect the
agricultural output in the country. Apart from monsoon other natural calamities like Floods,
sunami, drought, earthquake, etc. also have an impact on the capital market of a country. The
Indian Met Department (IMD) on 24th June stated that India would receive only 93 % rainfall of
Long Period Average (LPA). This piece of news directly had an impact on Indian capital market
with BSE Sensex falling by 0.5 % on the 25th June. The major losers were automakers and
consumer goods firms since the below normal monsoon forecast triggered concerns that demand
in the crucial rural heartland would take a hit. This is because a deficient monsoon could
seriously squeeze rural incomes, reduce the demand for everything from motorbikes to soaps and
worsen a slowing economy.

C) Macro Economic Numbers:

The macroeconomic numbers also influence the capital market. It includes Index of Industrial Production
(IIP) which is released every month, annual Inflation number indicated by Wholesale Price Index (WPI)
which is released every week, Export Import numbers which are declared every month, Core Industries
growth rate ( It includes Six Core infrastructure industries Coal, Crude oil, refining, power, cement and
finished steel) which comes out every month, etc. This macro economic indicators indicate the state of
the economy and the direction in which the economy is headed and therefore impacts the capital market
in India. A case in the point was declaration of core industries growth figure.

D) Global Cues:

In this world of globalization various economies are interdependent and interconnected. An

event in one part of the world is bound to affect other parts of the world , however the magnitude
and intensity of impact would vary. Thus capital market in India is also affected by developments
in other parts of the world i.e. U.S. , Europe, Japan , etc. Global cues includes corporate earnings
of MNCs, consumer confidence index in developed countries, jobless claims in developed
countries, global growth outlook given by various agencies like IMF, economic growth of major
economies, price of crude oil, credit rating of various economies given by Moodys, S & P, etc.

E) Political stability and government policies:

For any economy to achieve and sustain growth it has to have political stability and pro- growth
government policies. This is because when there is political stability there is stability and
consistency in governmentsattitude which is communicated through various government
policies. The vice- versa is the case when there is no political stability .So capital market also
reacts to the nature of government, attitude of government, and various policies of the
government.

F) Growth prospectus of an economy:

When the national income of the country increases and per capita income of people increases it
is said that the economy is growing. Higher income also means higher expenditure and higher
savings. This augurs well for the economy as higher expenditure means higher demand and
higher savings means higher investment. Thus when an economy is growing at a good pace
capital market of the country attracts more money from investors, both from within and outside
the country and vice -versa. So we can say that growth prospects of an economy do have an
impact on capital markets.

G) Investor Sentiment and risk appetite:

Another factor which influences capital market is investor sentiment and their risk appetite .Even
if the investors have the money to invest but if they are not confident about the returns from their
investment, they may stay away from investment for some time.At the same time the investors

have low risk appetite, which they were having in global and Indian capital market some four to
five months back due to global financial meltdown and recessionary situation in U.S. & some
parts of Europe, they may stay away from investment and wait for the right time to come.

What is Investment?
Meaning
In simple terms, Investment refers to purchase of financial assets. While Investment Goods are those
goods, which are used for further production. Investment implies the production of new capital goods,
plants and equipment.

Different types of Investment available in India

In this article you will find many available options to make an investment. A number of options are
available today for a person to invest his money and make a decent return. Lets take a skim through all
those schemes.

1. Financial Assests(that cannot be traded)

A number of financial assets cannot be traded with a third party. Such schemes are listed below.
Bank Deposits: Its simple and every one know about it.
Post Office Savings
Provident Funds
Chit Funds
Company Deposits

2. Bonds
Bonds are debt securities or long term debt instruments. An authorized issuer of bond promises the person
who hods the bond to pay interest on particular periods and to return the principal after a fixed period (at
the time of maturity of the bond). Different types of bonds are:
Government Securities
Government Agency Securities
PSU Bonds
Private Debt Securities
Preference Shares

3. Stocks
Stocks represent ownership. A person who holds stocks of a particular company is treated as one of the
many owners of the company and deserves a share of the net profit that company earns after all expenses.
Stock is one of the best investment options available and at the same time it demands knowledge about
many fundamentals to make a decent return. Different types of stocks (as classified by financial analysts)
Growth Stocks
Value Stocks
Blue Chip Stocks
Income Stocks

4. Mutual Funds
Mutual Funds are a better investment option for those who cant find time to learn about stock market and
its trends or those who dont understand its working correctly. Mutual funds are usually managed by a
Private financial company or a Bank. Different types of mutual funds are:
Stock based schemes
Fixed income schemes
Monthly income schemes
Tax saving schemes
Hybrid schemes
Balance schemes
Sector schemes
Floating rate schemes

5. Insurance:
Insurance is also a form of investment. Different types of insurance investments are;
Endowment assurance policy
Money back policy
Whole Life policy
Term assurance policy
Unit Linked Policy ULIP

6. Financial Derivatives
These are financial instruments that are formed from value addition of the financial assets used for
investment. Two types are there;
Options
Futures

SECURITIES AND EXCHANGE BOARD OF INDIA

It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by the
Indian Parliament. SEBI is headquartered in the business district of BandrKurlaComplex in Mumbai, and
has Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai and
Ahmedabad.
Controller of Capital Issues was the regulatory authority before SEBI came into existence; it derived
authority from the Capital Issues (Control) Act, 1947.
Initially SEBI was a non-statutory body without any statutory power. However in 1995, the SEBI was
given additional statutory power by the Government of India through an amendment to the Securities and
Exchange Board of India Act 1992. In April, 1998 the SEBI was constituted as the regulator of capital
markets in India under a resolution of the Government of India.
The SEBI is managed by six members, i.e. by the chairman who is nominated by central government &
two members, i.e. officers of central ministry, one member from the RBI & the remaining two are
nominated by the central government. The office of SEBI is situated at Mumbai with its regional offices
at Kolkata, Delhi & Chennai.

FUNCTIONS AND RESPONSIBILITIES

SEBI has to be responsive to the needs of three groups, which constitute the market:
The issuers of securities
The investors
The market intermediaries

SEBI has three functions rolled into one body:

quasi-legislative ,quasi judicial and quasi-executive. It drafts regulations in its legislative capacity, it
conducts investigation and enforcement action in its executive function and it passes rulings and orders in
its judicial capacity. Though this makes it very powerful, there is an appeals process to create
accountability. There is a Securities Appellate Tribunal which is a three-member tribunal. A second appeal
lies directly to the Supreme Court.
SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g.
the quick movement towards making the markets electronic and paperless rolling settlement on T+2
basis). SEBI has been active in setting up the regulations as required under law.
SEBI has also been instrumental in taking quick and effective steps in light of the global meltdown and
the Satyam fiasco. It had increased the extent and quantity of disclosures to be made by Indian corporate
promoters. More recently, in light of the global meltdown, it liberalised the takeover code to facilitate
investments by removing regulatory structures. In one such move, SEBI has increased the application
limit for retail investors to Rs2 lakh, from Rs1 lakh at present.

POWERS
For the discharged of its functions efficiently, SEBI has been invested with the necessary powers
which are:
1. To approve by-laws of stock exchange.
2. To require the stock exchange to amend their by-laws.
3. Inspect the books of accounts and call for periodical returns from recognized stock
exchange.
4. Inspect the books of accounts of a financial intermediaries.
5. Compel certain companies to list their shares in one or more stock exchanges.

SEBI Committees
1. Technical Advisory committee
2. Committee for review of structure of market infrastructure institutions
3. Members of the Advisory Committee for the SEBI Investors Protection and Education Fund
4. Takeover Regulations Advisory Committee
5. Primary Market Advisory Committee (PMAC)
6. Secondary Market Advisory Committee (SMAC)
7. Mutual Fund Advisory Committee
8. Corporate Bonds & Securitization Advisory Committee
9. Takeover Panel
10. SEBI Committee on Disclosers and Accounting Standards (SCODA)
11. High Powered Advisory Committee on consent orders and compounding of offences
12. Derivatives Market Review Committee
13. Committee in Infrastructure Funds.

STOCK EXCHANGE
Meaning

Stock Exchange (also called as Stock Market or Share Market) is one important constituent of
capital market. Stock Exchange is an organized market for the purchase and sale of industrial and
financial security. It is convenient place where trading in securities is conducted in systematic
manner i.e. as per certain rules and regulation.
It performs various functions and offers useful services to investors and borrowing companies. It
is an investment intermediary and facilitates economic and industrial development of a country.
Stock Exchange is an organized market for buying and selling corporate and other securities.
Here, securities are purchased and sold out as per certain well-defined rules and regulation. It
provides a convenient and secured mechanism or platform for transaction in different securities.
Such securities include shares and debentures issued by public companies which are duly listed
at the stock exchange, and bonds debentures issued by the government, public corporations and
municipal and port trust bodies.
Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in
a free market economy. A stock exchange need not be traded as a place for speculation or
gambling den. It should act as a place for safe and profitable investment, for this, effective
control on the working of stock exchange for necessary. This will avoid misuse of this platform
for excessive speculation, scams and other undesirable and anti-social activities.

Definition of Stock Exchange

Stock exchanges are privately markets which are used to facilitate in securities.
The Indian Securities Contracts (Regulation) Act of 1956, define Stock Exchange as,
An association, organization or body of individuals, whether incorporated or not, established for
the purpose of assisting, regulating and controlling business in buying, selling and dealing in
securities.

Features of Stock Exchange

Characteristics or features of stock exchange are:-

1. Market for securities :

Stock exchange is a market, where securities of corporate bodies, government and semigovernment bodies are bought and sold.

2. Deals is second hand securities :

It deals with shares, debentures bonds and such securities already issued by companies.
In short it deals with existing or second hand securities and hence it is called secondary
market.
3. Regulates trade in securities:
Stock exchange does not buy or sell any securities on its own account. It merely provides
the necessary infrastructure and facilities for trade in securities to its members and
brokers who trade in securities. It regulates the trade activities so as to ensure free and
fair trade.
4. Allows dealing only listed securities:
In fact, stock exchanges maintain an official list of securities that could be purchased and
sold on its floor. Securities which do not figure in official list of stock exchange are called
unlisted securities. Such unlisted securities cannot be traded in the stock exchange.

5. Transactions effected only through members:

All the transactions in securities at the stock exchange are affected only through its
authorised brokers and members. Outsiders or direct investors are not allowed to enter in
the trading circles of the stock exchange. Investors have to buy or sell the securities at the
stock exchange through the authorised brokers only.
6. Association of persons:
A stock exchange is an association of persons or body of individuals which may be
registered or unregistered.
7. Recognition from central Government :
Stock exchange is an organised market. It requires recognition from the Central
Government.
8. Working as per rules:
Buying and selling transactions in securities at the stock exchange are governed by the
rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the
rule and guidelines is allowed in any case.
9. Specific location :
Stock exchange is a particular market place where place where authorised brokers come
together daily (i.e. on working days) on the floor of market called trading circles and
conduct trading activities. The prices of different securities traded are shown on electronic

boards. After the working hours market is closed. All the working of stock exchanges is
conducted and controlled through computers and electronic system.
10. Financial Barometers :
Stock exchanges are the financial barometers and development indicators of national
economy of the country. Industrial growth and stability is reflected in the index of stock
exchanges.