This document discusses capital markets and how they allow companies to raise long-term financing. It provides details on different types of securities like stocks, bonds, and how they are distributed in primary and secondary markets. It also explains key capital market constituents and how stock prices are determined on exchanges through supply and demand. The market price is set by the last traded price and can fluctuate based on buy and sell orders rather than a stock's intrinsic value.

1. 1

2. Supply of money
capitol
Individuals
Corporations
Institutions
Banks
Government
Buyers of money
capitol
Individuals
Corporations
Institutions
Banks
Government
Investors/lenders/sellers
of money capitol
borrowers
•NEW ISSUE
MARKET
•STOCK
MARKET
•FINANCIAL
INSTITUTIONS
WHAT IS CAPITAL MARKET ????
LONG TERM
LOANS
Wealth in the form of money or property
owned by a person or business…
2

3. Constituents of capital market
Lender’s
sector
Borrower’s sector
organized unorganized
Stock
exchange
NBFI
Corporate
security market
Government
security market or
gilt edged security
New issue
market
Secondary
market
Chit funds Money lenders
Development
banks
Investment
institutions
3

4. OIL DRUM
MFG.CO.
TO SELL HIS BUSINESS ……
TO RAISE CAPITAL…..
He needs long term loans …HOW ?
4

5. Shows his records to
investment banker
Registered with SEBI
THEN THE INVESTMENT BANKER
PAYS HIM $3MILLION ……and the
banker will sells the company’s
share…..thus acting as a
UNDERWRITER
ORGANISATION OF NEW ISSUES
(investigation of viability and prospects of new
projects----technical and resource evaluation)
UNDERWRITING OF NEW ISSUES
[Guaranteeing purchase of a specified amount
of new issue at a fixed price]
5

6. DISTRIBUTION OF NEW ISSUE
PUBLIC ISSUE BY
PROSPECTUS
• INVITATION
TO PUBLIC
• DONE
THROUGH
ADVERTISEM
ENT
PRIVATE PLACEMENT
BY UNDISTRIBUTED
SYSTEM
• SOLD TO BIG
INDUSTRIAL
INSTITUTIONS OR
ISSUE HOUSES
• THEY SELL THEIR
SHARES TO
THEIR
CONSUMERS I.E.
SOME SELECTED
FIRMS
/COMPANIES
RIGHT ISSUE
• OLD COMPANIES
SELL THE SHARE
OF ITS SHARE
HOLDERS
• PROPOSES TO
BUY NEW
SHARES IN
PROPORTION OF
THEIR OLD
SHARES AT LESS
THEN M.P
TENDER METHOD / OFFER FOR SALE / BONUS ISSUE
[Bidding] [issue houses] 6

7. Stockholders elect
the directors of the
corporation
Directors determine the dividend
to be paid out of the earning
7

8. Income statement
Rs.200
Balance sheet
Rs.70
EARNING PER SHARE
To sell at
Rs.1000 =M.P
of the company
Divided company into
100 pieces
Shares
outstanding
1 piece –Rs. 10 M.P per share
CASH FLOW STATEMENTS
profit
Left after
bankruptcy
Book valueBalance sheet per
share
[Equity ]
EPS
Rs. 2
P.E of business = P/E =M.P/EPS =
10/2 = 5 ………
MARGIN OF SAFETY = difference
between equity and M.P

9. 2 ways company can raise capital
Borrow money Selling shares
DEBT EQUITY
BONDS STOCK
Security in
Ownership
interest of
shareholders
in a
corporation
A
S
S
E
T
S
DEBT [Rs.6000]
SHARES [Rs.4000]
Rs.
10,000
40 share certificates
[1 share =Rs.100]
60 bond certificates
[ face value/par value = Rs.100]
9

10. Classification of corporate
securities
Ownership
securities
EQUITY
SHARES
PREFERENCE
SHARES DEFERRED
SHARES
NO
PAR
STOCK
Creditorship
securities
DEBENTURES
[Bonds]
ne
New securities that have never been previously issued
are offered
Earlier—issued to promoters or
founder for services Having no face value… dividend is
paid per share 10

11. ORDINARY /EQUITY
SHARES
PREFERENCE
SHARES
DEBENTURES/
BONDS
MATURITY permanent capital
Can’t be redeemed
Irredeemable
[no pay off] **
Redeemable **
[mature at a time]
CLAIM ON
INCOME
‘variable income
security’…cannot
legally force…..
Prior claim on
income over equity
shares **
legal obligation to
pay income on due
date
CLAIM ON
ASSETS
Residual claim No right in surplus
assets
No share in surplus
assets
CONTROL Each equity share=1
vote
No voting rights No control over
management
CALL FEATURE no Yes [may buy back] yes
OTHER
FEATURES
Limited liability
Cannot be held for
further losses ….enjoys
ownership without risks
Hybrid form of
security
Creditors of the
company
Pre-emptive right can issue right shares….shares must be
offered to existing shareholders ..
[Entitles a company to redeem its securities before maturity]
11

12. U will be given Rs.100 + r% on
maturity…or if the company goes
bankrupt
Bond
holder
shareholders
bankruptcy
Can’t pay off debt
People want to
liquidate assets
BOND VS INTEREST RATE [r%]
If r% Bond price
Or face value
Buys at 10%
For Rs. 1000
r% inc
to 15%
Wants to sell
before
maturity
People will buy
from him but
at Price < 1000
So this bond will
be traded at a
discount to par
If r% dec to 5%
Bond will be traded at
Premium to par
12

13. Expansion of business
To fill more orders he needs more
stockholders
13

14. Substantial assets, plants
tools ,equipment ,cash
Broad distribution of shares
among large no. of
shareholders
Examination of financial health
Annual net earning at
times of listing of ……
Finally it’s
listed and
made public.
Each time
ODM stock is
traded , the
price, no. of
shares
traded etc.
flashes ……
14

15. Ram from ‘place A’
decides to invest in
100 shares
‘Place A’ broker
wires his order to
NY office
The buy order is telephoned to floor of NY stock exchange
It’s given to firm’s floor
partner who becomes
Representative of
buyer Ram
He goes to floor where stock is traded
and bids $ 10 a share
15

16. The ‘place B’
broker wires the
sell order to his
firm’s
representative
on floor of NSE
Needs
money
•STOCK EXCHANGE organization
for buying and selling of listed
existing shares
[organized market]
•OVER THE COUNTER EXCHANGE
Securities that are not listed on an
organized stock exchange
Shares of small
companies
Limited
market
Direct negotiations between
stock brokers
16

17. This market people trade
money for food
17

18. This market people trade money for
proportional ownership of real
companies
18

19. seller buyer
Owner of 1 share
JNJ…….wants to
sell it for
$65
Stop order
Wants to own I
share of JNJ…
Stop order for
$64
19

20. Limit order –when
someone is willing to buy it
for $65 or more…
Limit order-when
someone is willing to
sell it for $64 0r less
People
don’t
want to
sell less
then
what they
could
make of
People don’t want to
buy more than they
had to pay for
20

21. sellers buyers
Stop order $64
Stop order $65
Wants to own 1
share of JNJ
market order
Market price is
now displayed as
$65 a share
21

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23. Does it mean the company is worth $65 a
share or did a couple of people traded it for
$65 a share?
How M.P is moving up and down----because it’s
not majority people determining M.P but a just
a few people ….det..it..
Market price
THOUSANDS of
orders a day cause
the M.P of the
company to move
up and down
23

24. The stock market behaves like a voting machine ,but in the long run
it acts like a weighing machine…………..Benjamin Franklin
Short term:
Anyone can price the
stock
Long term:
The value becomes
absolute
24

25. Instincts
Behavior performed
Without based on
Previous experience
Trading on instincts ---
---Is emotion based
approach
FEAR GREED
value based approach
Knowing true intrinsic
value of company
DAY TRADING
e.g.; AMERICAN
EAGLE COMPANY
25

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28. People are
chasing
prices..not
value
MINDSET : a
quick buck is
about to be
made
people are scared they’ll loose
everything
MINDSET : I DON’T KNOW THE
VALUE OF THESE STOCKS ,so I
am out of here 28

29. •Owners without loyalty
•Sway between greed and fear
•A click changes ownership
•What matters is money
TRANSIENT INVESTORS Markets run on
psychology
Pure finance : 1+1=2
finance + psychology:
1+1=10704047
GREED : over confidence and over optimism
FEAR : aversion and decision paralysis
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