Important Terms of Capital Market – Terminology PDF
What is a market?
An actual or virtual place where forces of demands and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods, services, or contracts or instruments for money and barter.
There are two types of financial markets which are described below.
A money market is a component of financial market where short-term borrowing can be issued. This market includes assets that deal with short-term borrowing, lending, buying and selling.
A capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities. In other word, Capital market is where both equity and debt instrument like equity shares, preference shares, debentures, bonds, etc. are bought and sold. In this market, capital funds comprising both equity and debt are issued and traded.
Type of capital markets – Primary Market & Secondary Market.
The primary market is a new issue market; it solely deals with the issue of new securities. A place where trading of securities is done for the first time. The main objective is capital formation for government, institutions, companies, etc. also known as Initial Public Offer (IPO). Now, let us have a look at the functions of primary market.
After the primary market is the secondary capital market. This is more commonly known as the stock market or the stock exchange. In the secondary market, the trading is for already existing securities. There is no fresh issue in the secondary market.
Public offers are an expensive affair. The incidental costs of IPO’s tend to be very high. This is why some companies prefer not to go down this route. They offer investment opportunities to a select few individuals.
Initial Public Offering (IPO)
An IPO is the first sale or offering a stock by a company to the public. It happens when a company decides to go public rather than remain solely owned by private or inside investor. The securities Exchange Commission (SEC) has strict rules that companies must follow before issuing an IPO.
Generally, when a company is looking to expand or are in need of additional funds, they first turn to their current investors. So, the current shareholders are given an opportunity to further invest in the company. They are given the ‘right’ to buy new shares before the public is offered the chance.
Arbitrage refers to buying and selling the same security on different markets and at different price points. For instance, if stock XYZ is trading at $10 on one market and $10.5 on another, the trader could buy X shares for $10 and sell them for $10.50 on the other market, pocketing the differences.
Blue Chip Stocks
The stock behind large, industry-leading companies. Blue chip stocks offer a stable record of significant dividend payments and have a reputation of sound fiscal management. The expression is thought to have been derived from blue gambling chips, which is the highest denomination of chip used in casinos.
When the stock market as a whole is in a prolonged period of increasing stock prices. It’s the opposite of a bear market. A single stock can also be bullish or bearish.
A portion of a company’s earning that is paid to shareholder, or people that own that company’s stock, on a quarterly or annual basis. Not all companies pay dividends. For instance, if you trade penny stocks, you are likely after dividend.
A collection of investments owned by an investor makes up his or her portfolio. You can have as few as one stock in a portfolio, but you can also own an infinite amount of stocks or other securities.
Often refers to the measure of the return on an investment that is received from the payment of a dividend. This is determined by dividing the annual dividend amount by the price paid for the stock. If you bought stock XYZ for $40 per share and it pays a $1.00 per year dividend, you have a yield of 2.5 percent.
Hedging is a risk management strategy employed to offset the losses in investments by taking an opposite position in a related asset.
Stock Exchanges in India
As of now there are 23 SEBI approved Stock Exchanges in the country. Stock market is managed and regulated by the Securities and Exchange Board (SEBI). Main are two Bombay Stock Exchange (BSE) & National Stock Exchange (NSE).To improve the efficiency of the exchanges, it is necessary to corporatise them.
- The act of reorganizing the structure of government owned entity into a legal entity with the corporate structure found in publicly trad companies.
- These companies tend to have a board of director (B of D), management and shareholders.
- However, unlike publicly traded companies, the government is typically the company shareholder and that the shares in the market are not traded publicly.
Demutualisation of Stock Exchange
- Demutualization is when a mutual company owned by its members converts into a company owned by shareholder.
- Transforming the legal structure of an exchange from a mutual form to a business corporation form is referred to as demutualisation.
- In mutual exchange, the three functions of ownership, management and trading are intertwind into a single group.
- A demutualised exchange, on the other hand, has all these functions clearly segregated, i.e. the ownership, management and trading are in separate hands.
- The BSE, NSE and OTCEI are not only corporatised but also demutualised with the segregation of ownership and trading rights of members.
- The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal Street, Mumbai (formerly Bombay). Established in 1875, the BSE is Asia’s first stock exchange. BSE was founded by Premchand Roychand. He was one of the most influential businessmen in the 19th century Bombay.
- The NSE was started in 1992 by banks and financial institutions including Industrial Financial Corporation of India (IFCI), IL&FS, Industrial Credit and Investment Corporation of India (ICICI), Punjab National Bank (PNB) and General Insurance Corporation.
- Foreign institutional investors can now invest up to 49 percent in stock exchanges in India.
A brokers is a member of a recognized stock exchange, who is permitted to do trading on the screen-based trading system of different stock exchanges.
Financial Products/ Instruments dealt with in the Secondary Market : –
- Equity Shares
- Rights Issue/ Rights Shares
- Bonus Shares
- Preferred Stock/ Preference Shares
- Cumulative Preference Shares
- Cumulative Convertible Preference Shares
- Participating Preference Share
- Security receipts mean receipts or other securities, issued by a securitisation company or a reconstruction company to any qualified institutional buyer pursuant to a scheme.
- Evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial assets involved in securitisation.
Government Securities (G-Secs)
- These are sovereign (credit risk free) coupon-bearing instruments which are issued by the Reserve Bank of India on behalf of the Government of India, in lieu of the Central Government’s market borrowing programme.
- These securities are available in a wide range of maturity dates, from short-dated (less than one year) to long-dated (up to thirty years).
- A debenture is a type of debt instrument that is not secured by physical assets or collateral.
- Debentures are backed only by the general credit worthiness and reputation of the issuer.
- A bond is a negotiable certificate evidencing indebtness.
- Coupon Bonds – These are normal bonds on which the issuer pays the investor/ holder interest at the predetermined rate (known as a coupon) at agreed intervals normally twice a year.
- Zero Coupon Bond – A bond issued at a discount and repaid at a face value is called a Zero Coupon Bond. No periodic interest is paid in this case. The difference between the issue price and redemption price represents the return to the holder.
- Convertible Bond – A bond giving the investor the option to convert the bond into equity at a fixed conversion price is referred as a Convertible Bond.
- Commercial papers are borrowings of a company from the market.
- Commercial papers are money market instrument issued normally for a tenure of ninety days.
These are short-term (up to ninety-one days) bearer discount security, issued by the Government (through the Reserve Bank of India) as a means of meeting its cash requirements.
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