AN OVERVIEW OF CAPITAL AND COMMODITY MARKET.

Notes 90 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Prajwal Hallale

1
M.VijayKumar
AsstProf
M.E.SInstituteofManagement
CHAPTER-I
ANOVERVIEWOFCAPITALANDCOMMODITYMARKET.
FinancialSystem:Itisasetofallfinancialinstitutionwhichfacilitatesfinancial
transactionsinfinancialmarkets.Itbringsunderitsfoldthefinancialmarketsandthe
financialinstitutionwhichsupportthesystem.
Definition
Financialsystemisacomplexwellintegratedsetofsubsystemoffinancialinstitutions,
market,instrumentsandserviceswhichfacilitatesthetransferandallocationoffunds
efficientlyandeffectively
Systemhelpstomobilizethesurplusfundsandutilizinginproductivemanner
Components
FinancialInstruments
FinancialMarkets
FinancialInstitutions
FinancialServices
RegulatoryAuthority
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FinancialMarkets
Financialmarketisaplaceormechanismwhichfacilitatesthetransferofresources
fromoneentitytoanother
Role
1.
Transferofresources:-FMfacilitatesthetransferofresourcesfromoneperson
toanother.
2.
Productivityusage:-Financialmarketsallowfortheproductiveuseofthefunds
infinancialsystemthusenhancingtheincomeandgrossnationalproduction.
3.
Growthinincome:-FinancialmarketsallowlendersearnInterestandDividedon
theirsurplusinvestablefundsthuscontributingtothegrowthintheirincome.
4.
Capitalformation:-Achannelthroughwhichsavingslowtoaidcapitaformation
ofacountry.
5.
Pricediscovery:-FMallowforthedeterminationofthepriceofthetraded
financialassetsthroughtheinteractionsofdifferentsetofparticipants.
Functionoffinancialmarkets
1.
Facilitatecreationandallocationofcreditandliquidity
2.
Servesasintermediaries
3.
Assistprocessofeconomicgrowth
4.
Catersfinancialneeds
Typesoffinancialmarkets
MoneyMarket
Definitions:Moneymarketiscollectivenamegiventothevariousfirmsandinstitutions
thatdealinvariousgradesofnearmoney
Characteristicsofmoneymarket(MM)
1.
Concernedwithborrowingandlendingofshorttermfundsonly.
2.
Sourceofworkingcapitalfinance.
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3.
Dealingsaredoneonnegotiationsandeffecttheirfinancialtransactionsthrough
telephone,telegram,mailoranyothermeansofcommunication
4.
Market.Iscomposedofseveralspecialisedsubmarketssuchas(1).callmoney
market.(2)
T.billmarket.(3)Discountmarket.(4)collateralloanmarket.
5.
Various instruments ofMM.areCallmoney(interbankloan),Certificate of
deposits(timedeposit)TreasurybilloftheGovt.,tradebills,commercialpapers
promissorynotesbyreputingco.’s
6.
DealersinMMare;-
(1)
CentralBank
(2)
CommercialBank
(3)
Discounthouses
(4)
Billbrokers
(5)
Insuranceco.’s
(6)
Financialcorporations
Functionsofmoneymarket
(1)
Itprovidesanoutlettocommercialbanksfortheemploymentoftheirshouttermfunds.
(2)
Itoffersachanneltonon-bankingfinancialinstitutionssuchasCo’s,financial
housesetc.fortheinvestmentoftheirshorttermfunds.
(3)
Itprovidesshorttermfundstoindustrialiststomeettheirrequirementsof
workingcapital.
(4)
IthelpstheGovttoraisethenecessaryshort-termfundsthroughtheissueof
treasurybillsorshort-termloans.
(5)
Itservesasamediumthroughwhichthecentralbackofacountrycanexercise
itscontroloverthecreationofcredit
CapitalMarket
Capitalmarketreferstotheinstitutionandmechanismfortheeffectivepoolingoflong-
termfundsfromtheinvestingparties..Itincludessharesdebenturesbondsand
securities
Classification
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Primarymarket
Secondarymarket
Featuresofcapitalmarket
1.
CapitalmarketsdealsinLong-termandmedium-termfunds.
2.
Itconcernedwiththetransferoflong-termandmedium-termfundsfrom
investingpartiestoindustrialandcommercialenterprises.
3.
Deals withOwnershipsecuritieslikeequitysharesandpreferencesharesand
CreditorshipSecuritieslikeDebentures&bonds
4.
Capitalmarketiscomposedofnewsecuritiesmarket(primarymarket),stock
Market(Secondarymarket)andSpecialFinancialinstitutions.
5.
Thedealersinthecapitalmarketareindividualinvestorsandinstitutionalinvestors.
ImportanceofCapitalMarkets
1.
Productiveuseofeconomy’ssavings
2.
Providesincentivesforsaving
3.
Facilitatescapitalformation
4.
Increasesproductionandproductivity
5.
Stabilizesvalueofsecurities
6.
Enablestechnologicalupgradation
FunctionsofcapitalMarket(CM)
1.
Mobilizationofsavings-
CapitalmarketfacilitatesLarge–Scalenationwidemobilisationofsavingsand
financialresources.ithelpsintransferofresourcesfrominvestorstoinstitutions
2.
Capitalformation
Capitalmarketfacilitatesaccelerationofcapitalformation.itchannelsidel
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resourcestovarioussegments
3.
Continuousavailabilityoffunds
Itensuresreadyandcontinuousmarketforlong-termfunds.
4.
Economicgrowth
CM accelerationproductionsectorandservicesectorand helpsin
perusingforeigncapitalforthequickereconomicdevelopmentofacountry.
5.
Returnsforinvestment
Capitalmarketsensureeffectiveallocationofthemobilisedfinancialresources
amongprojectswhichyieldhighestreturn
DifferencebetweenMoneymarketandCapitalMarket.
Moneymarket
CapitalMarket
Itisforperiodlessthanayear
Itsperiodexceedsoneyear
ItsuppliesfundsforcurrentBusiness
operations,workingCapitalrequirements
Itfinancesfixedcapital
requirementofTradeand
commerce
TheinstrumentsusedinMoney
Marketarebillsofexchange,like
shares,bondsetc
TreasuryBills
Dealswithsharesanddebentures
EachsingleMoneyMarketisofLarge
amount
e.g.TBof1lakh
Eachsingleinstrumentisofasmaller
valuee.g.,oneequityshare–Rs
10
Centralandcommercialbanksare
Themajorplayersinthismarket
Itincludeindividualandinstitutional
investors
MoneyMarketinstrumentsdonot
Havesecondarymarkets
Capitalmarketinstruments generally
have
secondarymarket
Transactionhappenswithoutbroker
Transactionhappensonlythroughan
broker
Actasaintermediarybetweendepositors
and
borrower
Linkbetweeninvestorand
company/entrepreneur
PrimaryMarket(or)NewIssuesMarket
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PrimaryMarket(PM)isthemarketinwhichfundsareraisedbyindustrialand
commercialenterprisesfrominvestorsthroughissueofshares,debenturesandbonds.
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FeaturesofPrimaryMarket
PMisconcernedwithlongtermfundsorcapital.
(1)
InthePMsecuritiesareforthefirsttime.ThatisPMisconcernedonlynew
issuesofsecuritiesforthisreasonPMarepopularlyknownasnewissuemarket.
(2)
Securitiesareissuedbyindustrialandcommercialco.directlytoinvestors.
(3)
Itpromotescapitalformationdirectly.
(4)
Thefundsraisedintheprimarycapitalmarketareutilisedbytheissuingco.’sfor
investmentonfixedcapitalthatisassets
Newissuemechanism
AcompanycanrisefinancebyissuingE.g.Sharesindifferentforms.
IPO(initialPublicOfferings)
FPO(FollowUpoffer)
Rightissue.
PvtPlacements.
PreferentialAllotments.
Boughtoutdeals(offerfor
sale).BookBuilding
1)
IPOInitialPublicOffer
Ainitialpublicofferingisprocessofissuingsharetothepublicforthefirsttimebyacompany
PROCEDUREREGARDINGNEWISSUES:
1.
IssueofProspectus-Acompany,whichintendstoraisefinancefromthepublic
throughnewissues,mustbefamiliartopublic..Thiscanbedonebyissuinga
prospectus.Theprospectusis
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anydocumentdescribedorissuedasaprospectusandincludesanynotice,
circular,advertisementorotherdocumentinvitingdepositsfromthepublic,inviting
offersfromthepublicforthesubscriptionorpurchaseofsharesordebenturesofa
company.
2.
Application-Whenacompanyissuestheprospectus,theinvestors/publicmay
applyforthesharesofferedbythecompany.Theseapplicationformsmaybe
obtainedfromthebrokers,bankersorleadmanagers,whoassistthecompanyinthe
issueofnewshares.Theapplicationmaybeinthenameofindividualsorcompanies.
Theapplicantusuallypaysanamountcalled‘applicationmoney’alongwiththe
application
3.
Applicationforlistingofsecurities-Acompanycancreateafavorableimpressionin
themindsoftheinvestorsaboutitsfinancialsoundness,marketabilityofitssharesetc.,
bygettingitssecuritieslistedinstockexchange.Theprospectusfornewissuesshould
includedetailsregardingsubmissionofapplicationformforlistingofitssecuritiesin
recognizedstockexchanges.
4.
Allotmentofshares-Onclosingthesubscriptionlist,thecompanycanallot
sharestotheapplicants.Afterallotmentofshares,theallotteesbecomethe
shareholdersofthecompany.
5.
Allotment/Regretletter-Aftertheallotmentofshares,theallotment letters
or sharecertificatesbesenttotheallotteeswithinareasonabletime,say,twomonths
from thedateofclosingofsubscriptionlist.Lettersofregretalongwithrefundorders
mustbesenttonon-allotees
Advantagesofgoingpublic
(1)
Accesstocapital-basicpurposeforgoingpublicistohavelargeraccessto
capitalforlongtermlongterm
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(2)
Stockholderdiversification-founderscandiversifytheirholdingsandthereby
reducetheriskofportfolio.
(3)
Investor’srecognition.
(4)
Liquiditytopromoters-
(5)
Reputationofthecompany-whencompanygoforpublicitenhancesthe
imageadreputationofthecompany
(6)
SignalsfromMarkets.itprovidesusefulinformationaboutthemarkettomanagers
Disadvantages
(1)
Dilutionofcontrol-whensharesareissuedtopublicitleadstodilutionof
proportionateownershipinthefirm
(2)
Lossofflexibility.-companywillloseitflexibilityindecisionmakingprocess
sincetheyareaccountabletopublic
(3)
Disclosure-companyrequirestodisclosetheinformationtoinvestors
(4)
Accountability-companyshouldberesponsibleandaccountabletopublicin
managementactivitiesastheyaretheownersofthecompany
(5)
Costassociatedwithissue-apartfrom costissuingsharescompanyfrom
costissuingsharescompanyhastoincurcostforprovidinginvestorsfor
periodicalreports,holingshareholdersmeetingsetc
PartiesinvolvedinIPO
Managerstotheissue/Leadmanagers.
LeadManagersareappointedbythecompanytoregulatetheinitialpublicissue.
Themainduties-
(a)
Draftingofprospects.
(b)
Preparingthebudgetsforestimatetheexpenses.
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(c)
Suggestingtheappropriatetimingsofthepublicissue.
(d)
Provideassistanceinmarketing.
(e)
Livingadvicetofixofregisters,underwriters,brokers,bankersand
theadvertisingagentsetc.
(f)
Directingthevariousagenciesinvolvedinthepublicissue.
Registrartotheissue.
Aftertheappointmentoftheleadmanagerstotheissuetheregistoris
appointedforthepurposeof
(a)
Receiveshareapplicationfromvariouscollectioncentres.
(b)
Basicofallotmentofshares.
(c)
Consultationwithregionalstockexchangeforapproval.
(d)
Sharecertificatedispatching.
Underwriters.
Underwritersactasamiddlemeninbetweenthecompany&thepublic.Theun
subscribedcapitaliscollectedbythecompanyfrom theunderwritersoncetheUW is
purchasedsomeshareforguaranteepurposehewillbecometheshareholders.
AdvertisingAgent.
Advertising plays a Keyrole in promoting the public issue.Ittakes the
responsibilityofgivingpublicitytotheissueonthesuitablemedia.
Issuemanagementactivities
Merchantbankeristheagencythatplanco-ordinateandcontroltheenliteissueactivity
themerchantbankerdividedintophases
(1)
Pre-issuemgt
(2)
Post-issuemgt
Stepsinpreissuemgt
(1)
Obtainingstockexchangeapprovals
(2)
TakingactionsasperSEBIguidelines
(3)
Finalisingtheappointment
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AN OVERVIEW OF CAPITAL AND COMMODITY MARKET.

AN OVERVIEW OF CAPITAL AND COMMODITY MARKET.

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