Capital Markets

Day 1 - Capital Markets

Financial Markets

Financial Markets Overview

Global Financial Markets

Need for Financial Markets

Role of Financial Market

Players in Financial Markets

Types of Financial Markets

Segmentation of Financial Markets

Pillars of Financial Markets

What is Capital Market?

Capital Markets serve to channel savings and surplus financial resources in the economy, i.e. funds from the suppliers of capital to users or demanders of capital.

The capital market can be defined as a 'meeting place' where those who require capital seek out others who have surplus capital. Originally, meeting places were physical spaces but now participants are located at different geographical locations and the deals are conducted via electronic devices.

Global Capital Markets

Capital Market Participants

Stock Exchange vs. OTC

Risks in Capital Markets

Asset Classes

Equity - Types of Stock

Common Stock

The ownership of common stock entitles shareholders to a number of rights not available to other individuals

Only the owners of common stock are permitted to vote on certain key matters concerning the firm such as election of the board of directors, adoption of byelaws, amendment to corporate charter, new equity issue etc.

They have right to a residual claim of income and assets after all prior claims (by bondholders, creditors etc.) have been paid.

They have limited liability (a common shareholder's risk is limited to the value of his or her investment)

The total return on common stock investments comes from dividend income (yield) and capital gains (appreciation in the price of the shares)

Preferred Stock

Preferred stock represents an equity interest in a firm that usually does not allow for significant voting rights

Preferred shareholders technically share the ownership of the firm with common shareholders and are therefore compensated only when earnings have been generated

A cumulative provision on most preferred stock prevents dividends from being paid on common stock until all preferred stock dividends (both current and those previously omitted) have been paid

Normally the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend

Dividend paid is not a tax deductible expense for the firm making preferred stock more expensive than bonds

Different Stock Exchanges across Globe

New York Stock Exchange

The New York Stock Exchange (NYSE), popularly known as the Big Board, celebrated its bicentennial in 1992.

The NYSE Group is a for-profit, publicly-owned company; its share-code is NYX

About 2800 U.S. companies and 450 non-US companies are listed

More than $22 trillion market value

The NYSE has 1,366 exchange members. The exchange members:

Are said to own "seats" on the exchange.

Collectively own the exchange, although it is managed by a professional staff.

The seats are regularly bought and sold.

1366 seats (fixed)

Seat price range $2 million to $ 4 million depending on demand / supply

Seat price changes in response to many factors; market conditions, technology and competition are three of the many factors

NYSE Trading Floors

Seven specialist firms; down from 10 in the recent past and a steep decline from 81 in 1975; result of consolidation among specialist firms

470 specialists; specialists work for specialist firms

Each specialist has 5 to 10 stocks

Specialists process trades from floor brokers (5%) and electronically (95%)

Since 1997, the NYSE Allocations Committee has allowed listing companies to choose which specialist will handle the company's stock

NASDAQ

NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations system) was established in 1971 as a subsidiary of the NASD (National Association of Securities Dealers)

It is the second largest stock market in the U.S. in terms of total dollar volume of trading.

NASDAQ is a U.S. electronic stock market; it was started to improve the transparency of the over-the-counter market for unlisted stocks

By 1995 it had surpassed the NYSE in reported trading volume

NASDAQ is now a private for-profit corporation owned by its shareholders and traded at its own exchange after NASD reduced its ownership to about 30%; share-code is NDAQ

NASDAQ