Capital market function and impact on economic factors.




What are capital markets?

The capital market is a market for financial investments
which are direct or indirect capital statements. The capital market consists of
a network of structures and processes through which medium-term and long-term
funds are combined and made available to companies, governments and
individuals.

Capital market is important for raising capital by the
economy’s corporate sector and for protecting investor interest in corporate
securities. There is a need to strike a balance between raising capital for
economic development on the one hand and securing investors on the other.
Unless the rights of creditors are secured, it is not necessary for companies
to raise money. An effective capital market can provide a capital raising tool
and also protect investors in corporate securities.

The capital market also includes the mechanism by which
outstanding shares are exchanged. The capital market is a place where
distributors and capital consumers meet and share their views and where a
balance between the various market participants is found. The securities
decouple the savings and investment actions of individuals over time, space and
institutions and thus encourage investments to occur without concomitant
investment. 

How many types of capital market? 

Capital market function and impact on economic factors.

Primary Market

Primary Market – If a financial instrument is published
first, it is sold in the primary market. This is the market where new issues
are being sold, and new capital is being raised. It is therefore the business
whose profits directly benefited the issuer of the financial device. Securities
issuing to follow securities laws. The main sector can be defined as the
private placement market and the public market. In other words, the industry is
considered the main market where capital is deployed by businesses through the
issue of new shares. Such resources are needed to develop, modernize, diversify
and update new projects as well as existing ones.
The efficiency of a country’s economy is measured by stock
exchange
transactions.

How Primary Market function of capital markets issue?

Offering new issues to the public market typically involves
using an investment bank. How investment banks are active in this process,
which is called stock underwriting. Another way to present new issues is
through an auction process. In this way, bonds by certain bodies, including
municipal governments and some controlled agencies, are problems.
 

Step by step we explain all process:- 

Investment bankInvestment banks, like commercial banks,
are highly leveraged entities which play important roles in both primary and
secondary markets. The first role is supporting companies, government
departments
, state and local governments, and foreign entities (sovereigns and
businesses) in raising funds. The second role is to assist investors who wish
to invest funds in secondary market deals by serving as brokers or dealers.

Investment banking activities include:

IPO (Initial Public Offering) (capital markets)
Trading of securities (capital markets)
Private placement of securities (capital markets)
Merchant banking (capital markets)
Securities finance (capital
markets
)
Asset management (capital markets)

Capital market function and impact on economic factors.
Why we are put (capital markets) in front of activities
because it’s important you can’t ignore.

We discuss each of these activities in this post.

IPO (Initial Public Offering) / (capital markets)- IPO
playing a major role in capital market. The investment bankers may be required
in the advisory role to develop a security structure that is more attractive to
investors than the financial instruments currently available.

There are two types of schemes for underwriting: firm
commitment and best efforts. The investment bank purchases the newly issued
security from the issuer at a fixed price in a firm contract agreement, and
then sells the security to the public. The price it sells the shares to the
public is known as the re-offering price. The investment banking company does
not purchase the newly issued shares from the issuer in a best-effort
underwriting deal. Instead, it only decides to use its resources to market the
defense to the public and receives the aggregate profit on what it can sell
instead.

Trading of securities / (capital markets) – It’s also
playing an important role in capital market. From above IPO role how, revenue
is generated. Revenue in the form of a commission on transactions in which the
investment bank acts as an agent or broker. The investment bank does not take a
position in the trade in such trades, ensuring it is not placing its own money
at risk.

1 The difference between the price at which the investment
bank sells the security and the price paid for the securities (called the
bid-ask).
2 Appreciation of the price of the securities held in
inventory. (Obviously, if the price of the securities decline, revenue will be
reduced.

Private placement of securities – Issue new public-market
security; another form of issuance is through private placement to a limited
number of institutional investors, such as insurance companies, investment
firms and pension funds. They are playing a major role in stock market as well
as in capital market.

Merchant banking / (capital markets) – (This sound looks
good in capital market), the merchant banking operation is one in which the
investment bank invests its own money either as an investor, or as a partner.
Inside an investment bank, there are divisions or departments dedicated to
merchant banking. That may be in the form of a collection of private equity
funds in the case of equity investment.

Securities finance services / (capital markets) – In the
securities market or (capital market), the main method for borrowing funds is
through a repurchase arrangement (referred to as a repo), or by bank borrowing.
A repo is a collateralize debt where the asset obtained is the collateral.
Investment banks are earning interest on repo activities. In a transaction
known as a securities loan transaction a customer may borrow a safe. In such
deals the security lender receives a premium for the securities lending.
Investing funds or investing debt operations are referred to as finance shares.

You may also like to know about this method is very
attractive in stock market. Whole process is about capital market but they
implement in stock market as well. Many big players earning from this strategy. 

Asset management / (capital markets) – An investment bank
may have one or more branches managing client assets such as insurance
companies
, endowments, trusts, corporate and public pension funds and high-net
worth individuals. Such branches of asset management might also be mutual funds
and hedge funds. Asset management generates fee revenue based on a percentage
of the funds handled.


Secondary market – A secondary market (playing a vital role
in capital markets) is one where the investors resell financial instruments. No
new capital is raised and the security issuer does not directly benefit from
the transaction. Trading happens between investors. Investors who buy and sell
securities on the secondary markets may purchase services for their clients
from stock brokers, individuals who buy or sell securities.

The secondary market has two additional components, namely
the demand for over – the-counter (OTC) and the one traded on sale. OTC is
distinct from the market place offered by India Limited’s Over The Counter
Exchange
. OTC markets are essentially informal markets in which trade is
negotiated the majority of government securities trades are on the OTC
exchange. On the OTC exchange all the cash markets where shares are exchanged
for instant distribution and payment.

The forward market is a variation of the secondary market,
where shares are exchanged for future distribution and payment. The structured
business is pure forward out hand. Formal-market variants of forward are
futures and options. Standardized shares are exchanged in the futures market
for potential distribution and settlement.

Which securities are work under in secondary market of
capital markets function.

Shares, Derivatives, Bonds, Debentures, Debenture stock,
Third Markets, Fourth Markets or other marketable securi
ties.

Now, we will discuss about secondary market functions: –

Shares (capital markets) Equity shares commonly referred
to as ordinary shares often represent the type of fractional ownership in which
the buyer, as a fractional investor, takes out the full entrepreneurial risk
associated with a business venture. The owners of such shares have voting
rights and is a member of the company. An organization can issue shares with
differential voting rights, dividend payment etc.

Derivatives (capital markets) – The future and the
possibility belong to the categories of derivatives (there are many categories
in capital markets).  Derivatives-The
derivatives are contracts that derive their value from the value of one or more
other assets. Some of the most commonly traded derivatives are futures,
forwards, options and swaps.

Bonds (capital markets) – The bond is the debt instrument of
the bond issuer to the holders. The most common types of bonds are municipal
bonds and corporate bonds. The loan is a collateral insurance under which the
lender owes the obligation to the investors and (depending on the conditions of
the contract) is obliged to pay them interest (the coupon) or to refund the principal
at a later date, the due date. Interest is usually due at fixed intervals
(semi-annual, yearly, often monthly). Bonds also use as an investment in
capital market or we can say stock market.

Debentures (capital markets) – Debenture contains debenture
stock. bonds and any other corporate instruments, whether or not they represent
a tax on the corporation’s properties. Debenture is a document which proves or
accepts a debt. It’s a vast topic not explain in this post you can learn other
post.

Third Markets (capital markets) – Third market in finance,
refers to the trading of exchange-listed securities in the over-the-counter
(OTC) market. These trades allow institutional investors to trade blocks of
securities directly, rather than through an exchange, providing liquidity and
anonymity to buyers.

Fourth Markets (capital markets) – Fourth market trading is
direct institution-to-institution trading without using the service of
broker-dealers, thus avoiding both commissions, and the bid-ask spread. Trades
are usually done in blocks. It is impossible to estimate the volume of fourth
market activity because trades are not subject to reporting requirements.

This is all about primary market and the secondary market.
But, capital market not complete without Financial System, Interest Rate
Determination
, Structure of Interest Rates, Derivatives functions, Asset
Valuation (Stock Valuation Models)
, Asset Valuation (Asset Pricing) these are
all in capital market. Capital market is big topic not easily understand
without above mention topic.

Now, you are taking advance step in Capital Market
(finance). Without finance sound we are not able to understand capital markets,
so let’s start.

The financial system has three components:
Financial markets, financial intermediaries, and regulators
of financial activities.

FINANCIAL ASSETS – An asset is defended as any resource that
is expected to provide future benefits and therefore has economic value. Assets
may be divided into two categories: tangible assets and intangible assets. The
value of a tangible asset depends on the physical properties of the asset.
Buildings, aircraft, land and equipment are examples of tangible assets. The
value of an intangible asset bears no relation to the manner in which the
claims are registered, physically or otherwise. Financial assets are intangible
assets where the future benefits usually come in the form of a future cash
claim. A financial instrument is another term used for a financial asset.

Debt Instruments – A debt instrument, also known as an
indebtedness measure, can be in the form of a note, a bond or a loan. The
interest payments which the borrower may make are set by law.

Interest Rate Determination – We are now focusing on a
critical aspect of the financial environment which affects the financial
decisions: interest rates. The Federal Reserve System, popularly called the
Fed, is the US central bank and is central banking institutions in its
respective countries, just like the Bank of England and the Bank of France. A
central bank’s job is to enforce monetary policy that serves the best interests
of the economic wellbeing of the country.

Structure of Interest Rates – For borrowing and saving,
interest rates are published. Such prices are not calculated randomly; in other
words, there are variables in how different types of loans and debt instruments
vary systematically. We refer to this as the interest rate structure and
address in this section the factors that affect this structure.

Base Interest Rate – The base rate is the minimum interest
rate fixed by a central bank of a nation to repay a loan. This rate is normally
taken by all the banks in that country as the regular interest rate. Once the
central bank has declared that its base rate, no bank shall be entitled to give
its customers any type of loan at a rate less than that fixed by a nation’s
central bank.

Derivatives functions – Derivatives have an important role
to play both on financial and commodity markets, helping market participants to
monitor their exposure to different risk forms. The different types of derivative
contracts are listed in this blog. Current and future contracts and options
contracts are the two main derivative contracts. Other types of financial deals
are theoretically identical to these two simple contracts: derivatives, caps
and floors.

Futures Contract – A future contract is a legal agreement to
buy or sell a commodity at a negotiated future price. A future deal is legally
binding. In terms of quantity, price, delivery times and arbitration at any
time, future contracts shall be standard contracts in the future. The contracts
expire on a set date called the contract expiry date. At the expiry, the
transfer of the asset or cash can be made to pay for future transactions.

Options Contract – An options contract is a contract that
gives the buyer (but not the obligation) to buy or sell the specific commodity
during, or at the end of the specified period at a fixed amount. The buyer or
owner of the option purchases the right for a premium from the seller or
publisher. If the owner or buyer exercises his right, the seller or writer of
an option is obliged to pay the obligation according to the terms of the
contract. Securities or a price index for securities could include the
underlying asset.

Asset Valuation (Stock Valuation Models) – Assessment is the
method of measuring financial asset fair value. This method is also called a
financial asset ‘evaluating’ or ‘pricing.’ The fundamental principle of
accounting is that the current value of the projected cash flows is the value
of any financial asset. This happens regardless of the financial assets.
Therefore, the valuation of a financial asset includes the following three
steps:
  • Estimating the expected cash flows.
  • Assessing the correct interest or interest rates to be
    used to discount the cash flows; and.
  • Calculating the present value of the expected cash flows
    using the interest rate or interest rates.
     



Asset Valuation (Asset Pricing) – Asset pricing models
describe the relationship between the expected return and the risks. As we will
see in later chapters, in order to measure an asset an estimation of the
expected return that capital providers need on investments is needed. So, while
we’re referring in this chapter to asset pricing models, we mean the expected
return investors need, given the risk associated with an investment.

It’s all about Capital markets here you can learn
different-different topics.

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