CAPITAL MARKETSpecialized Financial InstitutionsFaisal JavaidPh.D. scholar Finance University of Gujrat Sialkotfaisal.javed@uogsialkot.edu.pk

CAPITAL MARKETThe market where investment instruments like bonds, equities and mortgages are traded is known as the capital market. The primal role of this market is to make investment from investors who have surplus funds to the ones who are running a deficit.

The capital market offers both long term and overnight funds. The different types of financial instruments that are traded in the capital markets are: > equity instruments > credit market instruments, > insurance instruments, > foreign exchange instruments, > hybrid instruments and > derivative instruments.

Nature of capital market The nature of capital market is brought out by the following facts:It Has Two SegmentsIt Deals In Long-Term SecuritiesIt Performs Trade-off FunctionIt Creates Dispersion In Business OwnershipIt Helps In Capital FormationIt Helps In Creating Liquidity

Role of Capital Markets Mobilization of long-term resources (capital raising avenue for corporates) & investment avenue of investors including retail Intermediation Function- Distribution of these resources & investments in various viable projects Mechanism of entry and exit in a quick and transparent manner

Types of capital marketThere are two types of capital market:Primary market, Secondary market

Primary Market

It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital.This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET.

In this market, the flow of funds is from savers to borrowers (industries), hence, it helps directly in the capital formation of the country. The money collected from this market is generally used by the companies to modernize the plant, machinery and buildings, for extending business, and for setting up new business unit.

Features of Primary MarketIt Is Related With New IssuesIt Has No Particular PlaceIt Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii) Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public OfferIt comes before Secondary Market

Secondary Market The secondary market is that market in which the buying and selling of the previously issued securities is done. The transactions of the secondary market are generally done through the medium of stock exchange.The chief purpose of the secondary market is to create liquidity in securities.

Features of Secondary Market

It Creates LiquidityIt Comes After Primary MarketIt Has A Particular PlaceIt Encourage New Investments

CAPITAL MARKET RISK Investment in long term financial instruments is accompanied by high capital market risks. Since there are two types of capital markets- the stock market and the bond market. So risks are present in both the market.

Risk in the Stock Market Stock prices keep fluctuating over a wide range unlike the bank deposits or government bonds.The efficient market hypothesis shows the effect of fundamental factors in changing the price of the stock market.

The Efficient Market Hypothesis shows that all price movements are random whereas there are plenty of studies that reflect the fact that there is a specific trend in the stock market prices over a period of time. Research has shown that there are certain psychological factors that shape the stock market prices.

Sometimes the market behaves illogically to any economic news. The stock market prices can be diverted in any direction in response to press releases, rumors and mass panic.

The stock market prices are also subject to speculation. In the short run the stock market prices may be very volatile due to the occurrences of the fast market changing events.

Risk in the Bond MarketCapital market risk in the bond market arises due to interest rate changes. There is an inverse relationship existing between the interest rate and the price of the bond. Hence the bond prices are sensitive to the monetary policy of the country as well as economic changes.

Risks in Fixed Income Securities

Interest Rate RiskReinvestment RiskCredit RiskEvent RiskInflation Risk

Fixed Income Security

Fixed Income Security

CAPITAL MARKET REPORT

TheCapital Market Reportis prepared by thecapital market analystsand is of various types. There are four different kinds ofcapital market reports: >10-K Reports, >10-Q Reports, >Form 8-K Reports, >the Proxy Statements.

10-K Reports This is a kind ofannual reportof the company that contains information of the company's business, finances and management. This informs us about the bylaws of the company, other legal documents and the lawsuits that the company may have a hand in. 10-Q Reports or the Quarterly Reports The quarterly reports are the abridged form of the annual reports. They are issued at an interval of three months. They consist offinancial statementsand list the material events that have occurred in the company.

Form 8 K Report The companies that are publicly traded are required to maintain the Form 8-K where they record any material eventthat might have affected the financial status of the company Proxy Statements The proxy statement consists of business issues that need to be discussed in the meeting and a ballot for voting for the purpose of forming the new Board of directors.

CAPITAL MARKET INVESTMENT

Capital market investmenttakes place through thebond marketand thestock market. The capital market is basically the financial pool in which different companies as well as the government can raise long term funds.Capital market investmentthat takes place through the bond and the stock market may be elucidated in the following heads.

Capital market investments in the stock marketThe stock market is basically the trading groundcapital market investmentin the following: i) Companys stocks ii) Derivatives iii) Other securitiesThe capital market investments in the stock market take place by: 1) Small individual stock investors 2) Large hedge fund traders.The capital market investments can occur either in: 1) Thephysical marketby a method known as the open outcry.

2) Trading can also occur in thevirtual exchangewhere trading is done in the computer network. The investors in the stock market have the liberty to buy or sell the stock that they are holding at their own discretion unlike the case ofgovernment securities, bonds or real estate. The stock exchanges basically function as theclearing house for such liquid transactions. The capital market investments in the stock market are also done through the derivative instruments like thestock optionsand thestock futures.

Capital Market Investments in the Bond Market The bond market is afinancial marketwhere the participants buy and selldebt securities.The bond market is also differently known as the debt, credit or fixed income market.There are different types of bond markets based on the different types of bonds that are traded. They are:Corporate,Government and agency, Municipal,Bonds backed by mortgages & assets,Collateralized Debt Obligation.

The bonds, except for the corporate bonds do not have formal exchanges but are tradedover-the- counter. Individual investors are attracted to the bond market and make investments through thebond funds, closed-end-funds or the unit investment trusts. Another way of investing directly in the bond issue is theExchange-traded-funds.The capital market investment in the bond market is done by:Institutional investorsGovernments, traders andIndividuals.

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