From Wikipedia, the free encyclopedia
The trading floor of the New York Stock Exchange, one of the largest secondary capital markets in the world. As of
2013, most of the NYSE's trades are executed electronically, but its hybrid structure allows some trading to be
done face to face on the floor.
Capital markets are financial markets for the buying and selling of long-term debt- or equitybacked securities. These markets channel the wealth of savers to those who can put it to long-term
productive use, such as companies or governments making long-term investments. Financial
regulators, such as the UK's Bank of England (BoE) or the U.S. Securities and Exchange
Commission (SEC), oversee the capital markets in their jurisdictions to protect investors against fraud,
among other duties.
Modern capital markets are almost invariably hosted on computer-based electronic trading systems;
most can be accessed only by entities within the financial sector or the treasury departments of
governments and corporations, but some can be accessed directly by the public. There are many
thousands of such systems, most only serving only small parts of the overall capital markets. Entities
hosting the systems include stock exchanges, investment banks, and government departments.
Physically the systems are hosted all over the world, though they tend to be concentrated in financial
centres like London, New York, and Hong Kong. Capital markets are defined as markets in which
money is provided for periods longer than a year.
A key division within the capital markets is between the primary markets and secondary markets. In
primary markets, new stock or bond issues are sold to investors, often via a mechanism known
as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are
governments (which may be municipal, local or national) and business enterprises (companies).
Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The
main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth
funds, and less commonly wealthy individuals and investment banks trading on their own behalf. In the
secondary markets, existing securities are sold and bought among investors or traders, usually on
a securities exchange, over-the-counter, or elsewhere. The existence of secondary markets increases
the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash
out their investments if the need arises.
A second important division falls between the stock markets (for equity securities, also known as
shares, where investors acquire ownership of companies) and the bond markets (where investors
Difference between money markets and capital markets
Banks and banking[show]
The money markets are used for the raising of short term finance, sometimes for loans that are
expected to be paid back as early as overnight. Whereas thecapital markets are used for the
raising of long term finance, such as the purchase of shares, or for loans that are not expected to
be fully paid back for at least a year.
Funds borrowed from the money markets are typically used for general operating expenses, to
cover brief periods of illiquidity. For example a company may have inbound payments from
customers that have not yet cleared, but may wish to immediately pay out cash for its payroll.
When a company borrows from the primary capital markets, often the purpose is to invest in
additional physical capital goods, which will be used to help increase its income. It can take many
months or years before the investment generates sufficient return to pay back its cost, and hence
the finance is long term.
Together, money markets and capital markets form the financial markets as the term is narrowly
understood. The capital market is concerned with long term finance. In the widest sense, it
consist of a series of channels through which the saving of the community are made available for
industrial and commercial enterprises and public authorities.
Examples of capital market transactions
A government raising money on the primary markets
One Churchill Place, Barclays' HQ inCanary Wharf, London. Barclays is a major player in the world's primary and
secondary bond markets.
When a government wants to raise long term finance it will often sell bonds to the capital markets.
In the 20th and early 21st century, many governments would use investment banks to organize
the sale of their bonds. The leading bank would underwrite the bonds, and would often head up a
syndicate of brokers, some of whom might be based in other investment banks. The syndicate
would then sell to various investors. For developing countries, a multilateral development
bank would sometimes provide an additional layer of underwriting, resulting in risk being shared
between the investment bank(s), the multilateral organization, and the end investors. However,
since 1997 it has been increasingly common for governments of the larger nations to bypass
investment banks by making their bonds directly available for purchase over the Internet. Many
governments now sell most of their bonds by computerized auction. Typically large volumes are
put up for sale in one go; a government may only hold a small number of auctions each year.
Some governments will also sell a continuous stream of bonds through other channels. The
biggest single seller of debt is the US Government; there are usually several transactions for such
sales every second, which corresponds to the continuous updating of the US real time debt
A company raising money on the primary markets
When a company wants to raise money for long term investment, one of its first decisions is
whether to do so by issuing bonds or shares. If it chooses shares, it avoids increasing its debt,
and in some cases the new shareholders may also provide non monetary help, such as expertise
or useful contacts. On the other hand, a new issue of shares can dilute the ownership rights of
the existing shareholders, and if they gain a controlling interest, the new shareholders may even
replace senior managers. From an investor's point of view, shares offer the potential for higher
returns and capital gains if the company does well. Conversely, bonds are safer if the company
does poorly, as they are less prone to severe falls in price, and in the event of bankruptcy, bond
owners are usually paid before shareholders.
When a company raises finance from the primary market, the process is more likely to involve
face-to-face meetings than other capital market transactions. Whether they choose to issue
bonds or shares, companies will typically enlist the services of an investment bank to mediate
between themselves and the market. A team from the investment bank often meets with the
company's senior managers to ensure their plans are sound. The bank then acts as
an underwriter, and will arrange for a network of brokers to sell the bonds or shares to investors.
This second stage is usually done mostly through computerized systems, though brokers will
often phone up their favored clients to advise them of the opportunity. Companies can avoid
paying fees to investment banks by using a direct public offering, though this is not a common
practice as it incurs other legal costs and can take up considerable management time.
Trading on the secondary markets
An Electronic trading platform being used at the Deutsche Börse. Most capital market transactions are executed
electronically, sometimes a human operator is involved, and sometimes unattended computer systems execute the
transactions, as happens in algorithmic trading.
Most capital market transactions take place on the secondary market. On the primary market,
each security can be sold only once, and the process to create batches of new shares or bonds is
often lengthy due to regulatory requirements. On the secondary markets, there is no limit on the
number of times a security can be traded, and the process is usually very quick. With the rise of
strategies such as high frequency trading, a single security could in theory be traded thousands
of times within a single hour. Transactions on the secondary market don't directly help raise
finance, but they do make it easier for companies and governments to raise finance on the
primary market, as investors know if they want to get their money back in a hurry, they will usually
be easily able to re-sell their securities. Sometimes secondary capital market transactions can
have a negative effect on the primary borrowers - for example, if a large proportion of investors
try to sell their bonds, this can push up the yields for future issues from the same entity. An
extreme example occurred shortly after Bill Clinton began his first term as President of the United
States; Clinton was forced to abandon some of the spending increases he'd promised in his
election campaign due to pressure from the bond markets. In the 21st century, several
governments have tried to lock in as much as possible of their borrowing into long dated bonds,
so they are less vulnerable to pressure from the markets.
A variety of different players are active in the secondary markets. Regular individuals account for
a small proportion of trading, though their share has slightly increased; in the 20th century it was
mostly only a few wealthy individuals who could afford an account with a broker, but accounts are
now much cheaper and accessible over the internet. There are now numerous small traders who
can buy and sell on the secondary markets using platforms provided by brokers which are
accessible with web browsers. When such an individual trades on the capital markets, it will often
involve a two stage transaction. First they place an order with their broker, then the broker
executes the trade. If the trade can be done on an exchange, the process will often be fully
automated. If a dealer needs to manually intervene, this will often mean a larger fee. Traders in
investment banks will often make deals on their bank's behalf, as well as executing trades for
their clients. Investment banks will often have a department called capital markets: staff in this
department try to keep aware of the various opportunities in both the primary and secondary
markets, and will advise major clients accordingly. Pension and sovereign wealth funds tend to
have the largest holdings, though they tend to buy only the highest grade (safest) types of bonds
and shares, and often don't trade all that frequently. According to a 2012 Financial Times article,
hedge funds are increasingly making most of the short term trades in large sections of the capital
market (like the UK and US stock exchanges), which is making it harder for them to maintain their
historically high returns, as they are increasingly finding themselves trading with each other rather
than with less sophisticated investors.
There are several ways to invest in the secondary market without directly buying shares or bonds.
A common method is to invest in mutual funds or exchange-traded funds. It's also possible to
buy and sell derivatives that are based on the secondary market; one of the most common
being contract for difference - these can provide rapid profits, but can also cause buyers to lose
more money than they originally invested.
A market in which
s in the public and
private sectors also often
sell securities on the
capital markets in order
to raise funds. Thus, this
type of market is
composed of both the
primary and secondary
Investopedia explains 'Capital Markets'
Both the stock and bond markets are parts of the capital
markets. For example, when a company conducts an
IPO, it is tapping the investing public for capital and is
therefore using the capital markets. This is also true
when a country's government issues Treasury bonds in
the bond market to fund its spending initiatives.
What It Is:
The capital markets are a source of financing for companies around the world. The most
famous of the capital markets are the stock market and bond market.
How It Works/Example:
raise money for
issuing stock IPOs, bonds and
money market securities.
investors wish to earn interest or dividends on their savings can meet companies
raise funds by
To illustrate how a corporate bond moves through capital markets, suppose AB Co.
needs to raise $1000. AB Co. offers a 10-year bond on the bond market with a par
value of $1000. The bond is purchased by someone wishing to earn interest on the
$1000 that they have available. AB Co. receives the $1000 in cash and the investor
receives a bond and the promise of repayment plus interest. Should
the bondholder later decide he no longer wants the bond, he can sell it to another
To illustrate using stocks, suppose AB Co. decided to raise more funds by issuing ten
new shares of stock for $100 per share. AB Co. offers these shares in the market and
someone purchases all ten for $1000 total. This time, the investor obtains stock
certificates giving him partial ownership of the company. AB Co. gets the $1000 in
funds they wanted to raise. As in the example above, should this investor wish to no
longer hold these stocks, he can sell them to another investor in the stock market for
the current market price. Should the company have extra cash, it could buy the stock
back as well.Indian Capital Markets
Indian Capital Markets
Since 2003, Indian capital markets have been receiving global attention, especially from sound investors, due to
the improving macroeconomic fundamentals. The presence of a great pool of skilled labour and the rapid
integration with the world economy increased India’s global competitiveness. No wonder, the global ratings
agencies Moody’s and Fitch have awarded India with investment grade ratings, indicating comparatively lower
The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities market, was
established in 1992 to protect investors and improve the microstructure of capital markets. In the same year,
Controller of Capital Issues (CCI) was abolished, removing its administrative controls over the pricing of new equity
issues. In less than a decade later, the Indian financial markets acknowledged the use of technology (National
Stock Exchange started online trading in 2000), increasing the trading volumes by many folds and leading to the
emergence of new financial instruments. With this, market activity experienced a sharp surge and rapid progress
was made in further strengthening and streamlining risk management, market regulation, and supervision.
The securities market is divided into two interdependent segments:
The primary market provides the channel for creation of funds through issuance of new securities by
companies, governments, or public institutions. In the case of new stock issue, the sale is known as Initial
Public Offering (IPO).
The secondary market is the financial market where previously issued securities and financial
instruments such as stocks, bonds, options, and futures are traded.
In the recent past, the Indian securities market has seen multi-faceted growth in terms of:
The products traded in the market, viz. equities and bonds issued by the government and companies,
futures on benchmark indices as well as stocks, options on benchmark indices as well as stocks, and
futures on interest rate products such as Notional 91-Day T-Bills, 10-Year Notional Zero Coupon Bond,
and 6% Notional 10-Year Bond.
The amount raised from the market, number of stock exchanges and other intermediaries, the number of
listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor
The profiles of the investors, issuers, and intermediaries.
Broad Constituents in the Indian Capital Markets
Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The
following sources help companies raise funds:
Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and
foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors
who buy in the secondary market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds,
NRIs, ADR/GDR investors, etc.
Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant
bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub accounts, mutual Funds,
venture capital funds, portfolio managers, custodians, etc.
Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock exchanges, and the two
depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).
Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI),
and the Department of Company Affairs (DCA).
Appellate Authority: The Securities Appellate Tribunal (SAT)
SAT, regulators (SEBI, RBI, DCA, DEA), depositories, stock exchanges (with equity trading, debt market segment,
derivative trading), brokers, corporate brokers, sub-brokers, FIIs, portfolio managers, custodians, share transfer
agents, primary dealers, merchant bankers, bankers to an issue, debenture trustees, underwriters, venture capital
funds, foreign venture capital investors, mutual funds, collective investment schemes.
With the onset of globalization and the subsequent policy reforms, significant improvements have been made in
the area of securities market in India. Dematerialization of shares was one of the revolutionary steps that the
government implemented. This led to faster and cheaper transactions, and increased the volumes traded by many
folds. The adoption of the market-oriented economic policies and online trading facility transformed Indian equity
markets from a broker-regulated market to a mass market. This boosted the sentiment of investors in and outside
India and elevated the Indian equity markets to the standards of the major global equity markets.
The 1990s witnessed the emergence of the securities market as a major source of finance for trade and industry.
Equity markets provided the required platform for companies and start-up businesses to raise money through
IPOs, VC, PE, and finance from HNIs. As a result, stock markets became a people’s market, flooded with primary
issues. In the first 11 months of 2007, the new capital raised in the global public equity markets through IPOs
accounted for $107 billion in 382 deals out of the total of $255 billion raised by the four BRIC countries. This was a
sizeable growth from $90 billion raised in 302 deals in 2006. Today, the corporate sector prefers external sources
for meeting its funding requirements rather than acquiring loans from financial institutions or banks.
The emergence of the market for derivative products such as futures and forwards can be traced back to the
willingness of risk-averse economic agents to guard themselves against uncertainties arising out of price
fluctuations in various asset classes. By their very nature, the financial markets are marked by a very high degree
of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking in
asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset
prices on the profitability and cash flow situation of risk-averse investors. This instrument is used by all sections of
businesses, such as corporates, SMEs, banks, financial institutions, retail investors, etc. According to the
International Swaps and Derivatives Association, more than 90 percent of the global 500 corporations use
derivatives for hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter (OTC)
markets, interest rates (78.5%), foreign exchange (11.4%), and credit form the major derivatives, whereas in the
exchange-traded segment, interest rates, government debt, equity index, and stock futures form the major chunk
of the derivatives.
Futures contracts are standardized derivative instruments. The instrument has an underlying product (tangible or
intangible) and is impacted by the developments witnessed in the underlying product. The quality and quantity of
the underlying asset are standardized. Futures contracts are transferable in nature. Three broad categories of
participants—hedgers, speculators, and arbitragers—trade in the derivatives market.
Hedgers face risk associated with the price of an asset. They belong to the business community dealing
with the underlying asset to a future instrument on a regular basis. They use futures or options markets to
reduce or eliminate this risk.
Speculators have a particular mindset with regard to an asset and bet on future movements in the
asset’s price. Futures and options contracts can give them an extra leverage due to margining system.
Arbitragers are in business to take advantage of a discrepancy between prices in two different markets.
For example, when they see the futures price of an asset getting out of line with the cash price, they will
take offsetting positions in the two markets to lock in a profit.
Exchange-Traded Vs. OTC Contracts: A significant bifurcation in the instrument is whether the derivative is
traded on the exchange or over the counter. Exchange-traded contracts are standardized (futures). It is easy to
buy and sell contracts (to reverse positions) and no negotiation is required. The OTC market is largely a direct
market between two parties who know and trust each other. Most common example for OTC is the forward
contract. Forward contracts are directly negotiated, tailor-made for the needs of the parties, and are often not
Distinction between Forward and Futures Contracts:
contractual agreement between two parties
to buy or sell a standardized quantity and
quality of asset on a specific future date on
a futures exchange.
A forward contract is a contractual
agreement between two parties to buy or
sell an asset at a future date for a
predetermined mutually agreed price while
entering into the contract. A forward
contract is not traded on an exchange.
Trading place: A futures contract is traded
on the centralized trading platform of an
A forward contract is traded in an OTC
Transparency in contract price: The
contract price of a futures contract is
transparent as it is available on the
centralized trading screen of the exchange.
The contract price of a forward contract is
not transparent, as it is not publicly
Valuations of open position and margin
valuation of open position is calculated as
per the official closing price on a daily basis
In a forward contract, valuation of open
position is not calculated on a daily basis
and there is no requirement of MTM on
daily basis since the settlement of contract
is only on the maturity date of the contract.
Liquidity: Liquidity is the measure of
frequency of trades that occur in a
particular futures contract. A futures
contract is more liquid as it is traded on the
A forward contract is less liquid due to its
Counterparty default risk: In futures
contracts, the exchange clearinghouse
provides trade guarantee. Therefore,
counterparty risk is almost eliminated.
In forward contracts, counterparty risk is
high due to the customized nature of the
Regulations: A regulatory authority and the
exchange regulate a futures contract.
A forward contract is not regulated by any
Benefits of Derivatives
Price Risk Management: The derivative instrument is the best way to hedge risk that arises from its
underlying. Suppose, ‘A’ has bought 100 shares of a real estate company with a bullish view but,
unfortunately, the stock starts showing bearish trends after the subprime crisis. To avoid loss, ‘A’ can sell
the same quantity of futures of the script for the time period he plans to stay invested in the script. This
activity is called hedging. It helps in risk minimization, profit maximization, and reaching a satisfactory
risk-return trade-off, with the use of a portfolio. The major beneficiaries of the futures instrument have
been mutual funds and other institutional investors.
Price Discovery: The new information disseminated in the marketplace is interpreted by the market
participants and immediately reflected in spot and futures prices by triggering the trading activity in one or
both the markets. This process of price adjustment is often termed as price discovery and is one of the
major benefits of trading in futures. Apart from this, futures help in improving efficiency of the markets.
Asset Class: Derivatives, especially futures, offer an exclusive asset class for not only large investors
like corporates and financial institutions but also for retail investors like high networth individuals. Equity
futures offer the advantage of portfolio risk diversification for all business entities. This is due to the fact
that historically it has been witnessed that there lies an inverse correlation of daily returns in equities as
compared to commodities.
High Financial Leverage: Futures offer a great opportunity to invest even with a small sum of money. It
is an instrument that requires only the margin on a contract to be paid in order to commence trading. This
is also called leverage buying/selling.
Transparency: Futures instruments are highly transparent because the underlying product (equity
scripts/index) are generally traded across the country or even traded globally. This reduces the chances
of manipulation of prices of those scripts. Secondly, the regulatory authorities act as watchdogs regarding
the day-to-day activities taking place in the securities markets, taking care of the illegal transactions.
Predictable Pricing: Futures trading is useful for the genuine investor class because they get an idea of
the price at which a stock or index would be available at a future point of time.
Indian equities are traded on three major national exchanges: MCX Stock Exchange Limited (MCX-SX), Bombay
Stock Exchange Limited (BSE) and National Stock Exchange of India Limited (NSE).
MCX Stock Exchange Limited (MCX-SX), India’s new stock exchange, is recognized by the Securities and
Exchange Board of India (SEBI) under Section 4 of the Securities Contracts (Regulation) Act, 1956. The Exchange
was granted the status of a ‘recognized stock exchange’ by the Government of India on December 19, 2012. In
line with global best practices and regulatory requirements, clearing and settlement of trades is conducted through
MCX-SX commenced operations in Currency Futures in the Currency Derivatives segment on October 7, 2008
under the regulatory framework of SEBI and Reserve Bank of India (RBI). The Exchange commenced trading in
Currency Options on August 10, 2012. The Exchange received permissions to deal in Interest Rate Derivatives,
Equity, Futures and Options on Equity and Wholesale Debt segments, vide SEBI’s letter dated July 10, 2012. The
Exchange further received permission to commence trading in these new segments, vide SEBI’s letter dated
December 19, 2012. The Exchange commenced trading in the Equity segment on February 11, 2013.
BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity broking industry in India led
to the formation of the Native Share Brokers Association in 1875, which later became Bombay Stock Exchange
BSE is widely recognized due to its pivotal and pre-eminent role in the development of the Indian capital market.
In 1995, the trading system transformed from open outcry system to an online screen-based order-driven
The exchange opened up for foreign ownership (foreign institutional investment).
Allowed Indian companies to raise capital from abroad through ADRs and GDRs.
Expanded the product range (equities/derivatives/debt).
Introduced the book building process and brought in transparency in IPO issuance.
T+2 settlement cycle (payments and settlements).
Depositories for share custody (dematerialization of shares).
Internet trading (e-broking).
Governance of the stock exchanges (demutualization and corporatization of stock exchanges) and
internet trading (e-broking).
BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been at
par with the international standards. It is the first exchange in India and the second in the world to obtain an ISO
9001:2000 certification. It is also the first exchange in the country and second in the world to receive Information
Security Management System Standard BS 7799-2-2002 certification for its BSE Online Trading System (BOLT).
Benchmark Indices futures: BSE 30 SENSEX, BSE 100, BSE TECK, BSE Oil and Gas, BSE Metal, BSE FMCG
NSE was recognised as a stock exchange in April 1993 under the Securities Contracts (Regulation) Act. It
commenced its operations in Wholesale Debt Market in June 1994. The capital market segment commenced its
operations in November 1994, whereas the derivative segment started in 2000. NSE introduced a fully automated
trading system called NEAT (National Exchange for Automated Trading) that operated on a strict price/time
priority. This system enabled efficient trade and the ease with which trade was done. NEAT had lent considerable
depth in the market by enabling large number of members all over the country to trade simultaneously, narrowing
The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The futures
contract on NSE is based on S&P CNX Nifty Index. The Futures and Options trading system of NSE, called NEATF&O trading system, provides a fully automated screen based trading for S&P CNX Nifty futures on a nationwide
basis and an online monitoring and surveillance mechanism. It supports an order-driven market and provides
complete transparency of trading operations.
Benchmark Indices futures: Nifty Midcap 50 futures, S&P CNX Nifty futures, CNX Nifty Junior, CNX IT futures,
CNX 100 futures, Bank Nifty futures
Due to increasing globalization, the development at macro and micro levels in international markets is compulsorily
incorporated in the performance of domestic indices and individual stock performance, directly or indirectly.
Therefore, it is important to keep track of international financial markets for better perspective and intelligent
NASDAQ (National Association of Securities Dealers Automated Quotations)
NASDAQ is an American stock exchange. It is an electronic screen-based equity securities trading
market in the US. It was founded in 1971 by the National Association of Securities Dealers (NASD).
However, it is owned and operated by NASDAQ OMX group, the stock of which was listed on its own
stock exchange in 2002. The exchange is monitored by the Securities and Exchange Commission (SEC),
the regulatory authority for the securities markets in the United States.
NASDAQ is the world leader in the arena of securities trading, with 3,900 companies (NASDAQ site)
being listed. There are four major indices of NASDAQ that are followed closely by the investor class,
NASDAQ Composite: It is an index of common stocks and similar stocks like ADRs, tracking
stocks and limited partnership interests listed on the NASDAQ stock market. It is estimated that
the total components count of the Index is over 3,000 stocks and it includes stocks of US and
non-US companies, which makes it an international index. It is highly followed in the US and is
an indicator of performance of technology and growth companies. When launched in 1971, the
index was set at a base value of 100 points. Over the years, it saw new highs; for instance, in
July 1995, it closed above 1,000-mark and in March 2000, it touched 5048.62. The decline from
this peak signalled the end of the dotcom stock market bubble. The Index never reached the
2000 level afterwards. It was trading at 1316.12 on November 20, 2008.
NASDAQ 100: It is an Index of 100 of the largest domestic and international non-financial
companies listed on NASDAQ. The component companies’ weight in the index is based on
their market capitalization, with certain rules controlling the influence of the largest components.
The index doesn’t contain financial companies. However, it includes the companies that are
incorporated outside the US. Both these aspects of NASDAQ 100 differentiate it from S&P 500
and Dow Jones Industrial Average (DJIA). The index includes companies from the industrial,
technology, biotechnology, healthcare, transportation, media, and service sectors.
Dow Jones Industrial Average (DJIA): DJIA was formed for the first time by Charles Henry Dow.
He formed a financial company with Edward Jones in 1882, called Dow Jones & Co. In 1884,
they formed the first index including 11 stocks (two manufacturing companies and nine railroad
companies). Today, the index contains 30 blue-chip industrial companies operating in America.
The Dow Jones Industrial Average is calculated through the simple average, i.e., the sum of the
prices of all stocks divided by the number of stocks (30).
S&P 500: The S&P 500 Index was introduced by McGraw Hill's Standard and Poor's unit in
1957 to further improve tracking of American stock market performance. In 1968, the
US Department of Commerce added S&P 500 to its index of leading economic indicators.
S&P 500 is intended to be consisting of the 500 largest publically-traded companies in the US
by market capitalization (in contrast to the FORTUNE 500, which is the largest 500 companies
in terms of sales revenue). The S&P 500 Index comprises about three-fourths of total American
LSE (London Stock Exchange)
The London Stock Exchange was founded in 1801 with British as well as overseas companies listed on
the exchange. The LSE has four core areas:
Equity markets: The LSE enables companies from around the world to raise capital. There are
four primary markets; Main Market, Alternative Investment Market (AIM), Professional
Securities Market (PSM), and Specialist Fund Market (SFM).
Trading services: Highly active market for trading in a range of securities, including UK and
international equities, debt, covered warrants, exchange-traded funds (ETFs), exchange-traded
commodities (ETCs), REITs, fixed interest, contracts for difference (CFDs), and depositary
Market data information: The LSE provides real-time prices, news, and other financial
information to the global financial community.
Derivatives: A major contributor to derivatives business is EDX London, created in 2003 to
bring the cash, equity, and derivatives markets closer together. It combines the strength and
liquidity of LSE and equity derivatives technology of NASDAQ OMX group.
The exchange offers a range of products in derivatives segment with underlying from Russian, Nordic,
and Baltic markets. Internationally, it offers products with underlying from Kazakhstan, India, Egypt, and
Frankfurt Stock Exchange
It is situated in Frankfurt, Germany. It is owned and operated by Deutsche Börse. The Frankfurt Stock
Exchange has over 90 percent of turnover in the German market and a big share in the European
market. The exchange has a few well-known trading indices of the exchange, such as DAX, DAXplus,
DAX is a blue-chip stock market index consisting of the 30 major German companies trading on the
Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system of the Frankfurt
There are four main legislations governing the securities market:
The SEBI Act, 1992 establishes SEBI to protect investors and develop and regulate the securities
The Companies Act, 1956 sets out the code of conduct for the corporate sector in relation to issue,
allotment, and transfer of securities, and disclosures to be made in public issues.
The Securities Contracts (Regulation) Act, 1956 provides for regulation of transactions in securities
through control over stock exchanges.
The Depositories Act, 1996 provides for electronic maintenance and transfer of ownership of demat
In India, the responsibility of regulating the securities market is shared by DCA (the Department of Company
Affairs), DEA (the Department of Economic Affairs), RBI (the Reserve bank of India), and SEBI (the Securities and
Exchange Board of India).
The DCA is now called the ministry of company affairs, which is under the ministry of finance. The ministry is
primarily concerned with the administration of the Companies Act, 1956, and other allied Acts and rules
®ulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with
The ministry exercises supervision over the three professional bodies, namely Institute of Chartered Accountants
of India (ICAI), Institute of Company Secretaries of India (ICSI), and the Institute of Cost and Works Accountants of
India (ICWAI), which are constituted under three separate Acts of Parliament for the proper and orderly growth of
professions of chartered accountants, company secretaries, and cost accountants in the country.
SEBI protects the interests of investors in securities and promotes the development of the securities market. The
board helps in regulating the business of stock exchanges and any other securities market. SEBI is also
responsible for registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers
to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers, and such other intermediaries who may be associated with securities markets in any manner.
The board registers the venture capitalists and collective investments like mutual funds. SEBI helps in promoting
and regulating self regulatory organizations.
RBI is also known as the banker’s bank. The central bank has some very important objectives and functions such
Maintain price stability and ensure adequate flow of credit to productive sectors.
Maintain public confidence in the system, protect depositors' interest, and provide cost-effective banking
services to the public.
Facilitate external trade and payment and promote orderly development and maintenance of the foreign
exchange market in India.
Give the public adequate quantity of supplies of currency notes and coins in good quality.
Formulate implements and monitor the monetary policy.
Prescribe broad parameters of banking operations within which the country's banking and financial
Manage the Foreign Exchange Management Act, 1999.
Issue new currency and coins and exchange/destroy currency and coins not fit for circulation.
Perform a wide range of promotional functions to support national objectives.
The DEA is the nodal agency of the Union government to formulate and monitor the country's economic policies
and programmes that have a bearing on domestic and international aspects of economic management. Apart from
forming the Union Budget every year, it has other important functions like:
Formulation and monitoring of macro-economic policies, including issues relating to fiscal policy and
public finance, inflation, public debt management, and the functioning of capital market, including stock
exchanges. In this context, it looks at ways and means to raise internal resources through taxation,
market borrowings, and mobilization of small savings.
Monitoring and raising of external resources through multilateral and bilateral development assistance,
sovereign borrowings abroad, foreign investments, and monitoring foreign exchange resources, including
balance of payments.
Production of bank notes and coins of various denominations, postal stationery, postal stamps, cadre
management, career planning, and training of the Indian Economic Service (IES).
Factors affecting capital market in India :The capital market is affected by a range of factors . Some of
t h e f a c t o r s w h i c h influence capital market are as follows:a)Performance of domestic companies:The performance of the companies or rather corporate earnings is one of
thef a c t o r s w h i c h h a s d i r e c t i m p a c t o r e f f e c t o n c a p i t a l m a r k e t i n
a c o u n t r y. W e a k corporate earnings indicate that the demand for goods and services
in the economy isless due to slow growth in per capita income of people . Because of
slow growth indemand there is slow growth in employment which means slow growth in
demand int h e n e a r f u t u r e . T h u s w e a k c o r p o r a t e e a r n i n g s i n d i c a t e a v e r a
ge or not so goodp r o s p e c t s f o r t h e e c o n o m y a s a w h o l e i n t h e
n e a r t e r m . I n s u c h a s c e n a r i o t h e investors( both domestic as well
as foreign ) would be wary to invest in the capitalmarket and thus there is
bear market like situation. The opposite case of it would berobust corporate earnings and
it’s positive impact on the capital market. The corporate earnings for the April –
June quarter for the current fiscal hasbeen good.
The companies like TCS, Infosys,Maruti Suzuki, BhartiAirtel, ACC,
ITC,W i p r o , H D F C , B i n a n i c e m e n t , I D E A , M a r i c o C a n a r a B a n k ,
P i r a m a l H e a l t h , I n d i a cements , Ultra Tech, L&T, Coca- Cola, Yes
Bank, Dr. Reddy’s Laboratories, OrientalBank of Commerce, Ranbaxy,
Fortis, Shree Cement ,etc have registered growth innet profit compared to the
corresponding quarter a year ago.
Thus we see
companiesf r o m I n f r a s t r u c t u r e s e c t o r , F i n a n c i a l S e r v i c e s , P h a r m a c e u t i c
a l s e c t o r , I T S e c t o r , Automobile sector, etc. doing well . This across the
sector growth indicates that theIndian economy is on the path of recovery which has
been positively reflected in thestockmarket( rise in sensex& nifty) in the last two weeks.
(July 13-July 24).
b)Environmental Factors :Environmental Factor in India’s context primarily means- Monsoon . In India around60
% of agricultural production is dependent on monsoon. Thus there
i s h e a v ydependence on monsoon. The major chunk of agricultural
production comes fromthe states of Punjab , Haryana & Uttar Pradesh. Thus deficient
or delayed monsoon inthis part of the country would directly affect the
agricultural output in the
country.A p a r t f r o m m o n s o o n o t h e r n a t u r a l c a l a m i t i e s l i k e
F l o o d s , t s u n a m i , d r o u g h t , earthquake, etc. also have an impact on the
capital market of a country. The Indian Met Department (IMD) on
theJune stated that India would receive only 93% rainfall of Long Period Average (LPA).
This piece of news directly had an impact onIndian capital market with BSE Sensex
falling by0.5% o n t h e 25
theJ u n e . T h e m a j o r losers were automakers and consumer goods firms since the
monsoonforecast triggered concerns that demand in the crucial rural heartland would take
ah i t . T h i s i s b e c a u s e a d e f i c i e n t m o n s o o n c o u l d s e r i o u s l y
s q u e e z e r u r a l i n c o m e s , reduce the demand for everything from motorbikes to soaps
and worsen a slowingeconomy.
c)Macro Economic Numbers :The macro economic numbers also influence the capital market. It includes
Index of Industrial Production (IIP) which is released every month, annual
Inflation numberindicated by Wholesale Price Index (WPI) which
is released every week, Export –I m p o r t n u m b e r s w h i c h a r e d e c l a r e d
e v e r y m o n t h , C o r e I n d u s t r i e s g r o w t h r a t e ( I t includes Six Core
infrastructure industries – Coal, Crude oil, refining, power,
cementa n d f i n i s h e d s t e e l ) w h i c h c o m e s o u t e v e r y m o n t h , e t c . T
h i s m a c r o – e c o n o m i c indicators indicate the state of the economy and the
direction in which the economyis headed and therefore impacts the capital
market in India.A case in the point was declaration of core industries growth
figure. The six CoreInfrastructure Industries – Coal, Crude oil, refining,
finished steel, power & cement –grew6.5% in June , the figure came on the
23rd of July and had a positive
impact onthe capital market with the sensex and nifty rising by388
d)Global Cues :In
this world ofglobalisation various economies are interd
e p e n d e n t a n d 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 theworld i.e. U.S. , Europe, Japan ,
etc.G l o b a l c u e s i n c l u d e s c o r p o r a t e e a r n i n g s o f M N C ’ s , c o n s u m e r c o n
f i d e n c e i n d e x i n developed countries, jobless claims in developed
countries, global growth outlookgiven by various agencies like IMF,
economic growth of major economies, price of crude –oil, credit rating of various
economies given by Moody’s, S & P, etc.An obvious example at this point in time would
be that of subprime crisis & recession. Recession started in U.S. and some parts of
the Europe in early 2008 .Since then ithas impacted all the countries of the worlddeveloped, developing , less- developedand even emerging economies.
e)Political stability and government policies:For any economy to achieve and sustain growth it has to have political stability andprogrowth government policies. This is because when there is political stability thereis
stability and consistency in government’s attitude which is communicated through