Overview of Capital Markets

8/4/2019 Overview of Capital Markets

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Overview of global capital market. Market indices and

overview of Securities market in India – Primary and

Secondary market



Agenda (Lecture 1 and 2)

What is Investment? Investment Alternatives Investment Vs Speculation Investment Vs Gambling

Financial Markets and its Functions Classification of Financial Markets What is Capital Market? Bonds or Fixed Income Securities Equity Shares

Attraction of Global Capital Market Stock Market Indices and its computation SEBI Overview of Security Analysis Overview of Portfolio Management



The money you earn is partly spent and the rest saved for

meeting future expenses. Instead of keeping the savingsidle you may like to use savings in order to get return on itin the future. This is called Investment.



Investment AlternativesNon-Marketable Financial Assets (eg: Bank Deposits, Postoffice deposits etc)

Equity Shares

BondsMoney Market Instruments (Debt Instruments havingmaturity of less than one year at the time of issues)

Mutual Funds

Life InsuranceReal Estate

Precious Objects

Financial Derivatives



Investment Vs Speculation"An investment operation is one which, upon thoroughanalysis promises safety of principal and an adequatereturn. Operations not meeting these requirements are

speculative.“

Graham & Dodd

Speculation: The activity of forecasting the psychology ofthe market.

John Maynard Keynes



Investment Vs SpeculationInvestor Speculator

Planning Horizon Relatively longerplanning horizon, usually at least one year

Very short planninghorizon

Risk Disposition Normally not willing toassume more risk Ordinarily willing toassume high risk

Return Expectations Usually seeks a modestrate of return.

Looks for high rate of return

Basis for decisions Attaches greatersignificance tofundamental factors andattempts a carefulevaluation of theprospects of the firm

Relies more heavily onhearsay, technical chartsand market psychology

Leverage Typically uses his own

funds.

Normally resorts to

substantial amount of borrowing



Investment Vs Gambling Gambling is fundamentally different from speculation

and investment.

Compared to investment and speculation, the resultof gambling is known more quickly

Rational people gamble for fun, not for income

Gambling creates risk without providing any

commensurate economic return



Financial Markets and its Functions A financial market is a market for creation and

exchange of financial assets.

Functions: Facilitates Price Discovery

Provides Liquidity to Financial assets

Considerably reduce the cost of transacting



Classification of Financial MarketsThere are different ways to classify financial markets:

Nature of claim: Debt market and Equity Market

Maturity of Claim: Money Market and Capital Market

Timing of delivery: Cash or spot market and forwardsor futures markets

Organizational Structure: Exchange traded or Over

the counter



MONEY MARKETFunction of a money market is to channel savings into shortterm productive investment with minimum risk.Money market instruments:-

Call money

Term money

Treasury bills

Commercial papers

Certificates of deposits, etc.

Assignment 1: Write a brief description of the above terms?

Submission by Monday evening.



Financial Markets

Capital Market Money Market Forex Market

Primary

Market

Secondary

Market

Primary

Market

Secondary

MarketSpot

Market

Forward

Market

Cash

Market

Derivatives

Market



What is Capital Market A capital market is a market for securities (debt or

equity), where business enterprises (companies) andgovernments can raise long-term funds. It is defined as a

market in which money is provided for periods longerthan a year.

The capital market includes the stock market (equitysecurities) and the bond market (debt).

The main economic role of a capital market is to matchplayers who have excess funds to players who are inneed of funds.



Capital Market

Primary

Market

Stock Market

Secondary

Market

BondMarket



Bonds or Fixed Income SecuritiesBond or Debentures represent long-term debt instruments.

The issuer of a bond promises to pay a stipulated stream ofcash flows.

Various fixed income instruments include:

Government securities or gilt edged securities

RBI saving bonds Debentures

Public sector undertaking bond



Equity SharesEquity capital represents ownership capital. Equity shareholdersbear the risk and enjoys the reward of ownership.

Stock markets classify equity shares as:

Blue chip shares (Shares of Large well established, andfinancially strong companies with an impressive record ofearnings and dividend)

Growth shares (Shares of companies which enjoys an aboveaverage rate of growth as well as profitability)

Income shares (Shares of companies with fairly stableoperations, high dividend payout ratios).



Equity Shares

Defensive shares (Shares of companies that are generallyunaffected by ups and down in general business conditions)

Speculative shares (Shares that tend to fluctuate widely becausethere is a lot of speculation trading in them).



Types of Corporate Stock Preferred Stock

Fixed dividends, priority over common stock

Common Stock Variable dividends, based on company’s profits.

Convertible

Preferred stock that can be converted into

common stock at a stated price



Attraction of the Global Capital Market?

Increases the supply of funds available for borrowing.

Borrower’s perspective

Lowers the cost of capital.

Investor’s perspective

Provides a wider range of investment

opportunities.

Growth of Global capital market:

- TECHNOLOGY.- Deregulation by governments of capital flows andfinancial services.



Risk Reduction Through PortfolioDiversification

(a) Risk reduction through domestic diversification

0.27

1.0

1 10 20 30 40 50

U.S. Stocks

TotalRisk

SystematicRisk

Number of stocks

Variance ofportfolio return

Variance ofreturn on

typical stock



Risk Reduction Through PortfolioDiversification

(b) Risk reduction through domestic andinternational diversification

0.27

1.0

1 10 20 30 40 50

U.S. Stocks

International Stocks

Number of stocks

Variance ofportfolio return

Variance ofreturn on

typical stock

0.12



Stock Market Indices With large number of companies listed on the Bombay stock

exchange and NSE, it is not possible to look at the prices ofevery stock to find out whether the market movement isupward or downward.

An index is basically an indicator. It gives you a general ideaabout whether most of the stocks have gone up or most of thestocks have gone down.

Some of the stock market indices are BSE Sensex, BSE-200,NSE-50 etc.

The Sensex is an indicator of all the major companies of the BSEand Nifty is an indicator of all the major companies of the NSE.



Computation of stock index Suppose the Index consists of only 2 stocks: Stock A and Stock B.

So as of today the market capitalization of the index (i.e. stocks A and B) is Rs520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalization of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).

Shares TotalShares

Held by Promoters

FreeFloating

Shares

CurrentMarket

Price

TotalMarket

Capitalization

FreeFloat

MarketCap

A 1000 200 800 120 120000 96000

B 2000 1000 1000 200 400000 200000



Computation of stock index The year 1978-79 is considered the base year of the index with a

value set to 100. What this means is that suppose at that time themarket capitalization of the stocks that comprised the indexthen was, say, 60,000 then we assume that an index market capof 60,000 is equal to an index-value of 100.

Thus the value of the index today is = 296,000 x 100/60,000 =493.33

This is how the Sensex is calculated.

The factor 100/60000 is called index divisor.Note: During market hours, prices of the index scrips, at whichlatest trades are executed, are used by the trading system tocalculate Sensex every 15 seconds and disseminated in real time.



Differences between the indices The main factors that differentiate one index from the

other are given below:

1. The number of the component stocks

2. The composition of the stocks

3. The weights

4. Base year



Major stock market indices



Major stock market indices



SEBI (Securities & Exchange Board of India)

SEBI is the authority regulating the securities market of India. Allthe listed companies have to comply with its rules. Companiesare allowed to issue capital provided the issues are in conformitywith the published guidelines relating to disclosure ad othermatters relating to investor

The stock exchanges also come under the purview of SEBI.The functioning of stock exchanges is regulated by SEBI.



Security Analysis The process of analyzing the individual securities and the

market as a whole and estimating the risk and returnexpected from each of the investments with a view to

identifying undervalued securities for buying andovervalued securities for selling is both an art and ascience and this is what is called security analysis.

Security Analysis involves the projection of futuredividend, or earnings flows, forecast of the share price inthe future and estimating the intrinsic value of a securitybased on the forecast of earnings or dividends.



Portfolio Management The portfolio analysis is an analysis of the risk-return

characteristics of individual securities in the portfolioand changes that may take place in combination with

other securities due to interaction among themselvesand impact of each one of them on others.



Portfolio Management Process Determine investment objectives and policies

Undertake a security analysis

Construct a portfolio Review of portfolio

Evaluate the performance



Thank You

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Overview of Capital Markets

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