An efficient capital market is a key prerequisite for the commercial and industrial development of a nation. The capital market is an institution where investments and savings are channelled between capital suppliers and individuals who require capital. The most common and primary capital markets are the stock market and bond market. If you are planning to enter the stock market or the bond market, it is essential to have knowledge about capital markets. A capital markets course is a proficient way to learn about capital markets.
In this article, we will enlighten you on the basic of capital markets and its instruments.
What is a capital market?
A capital market is a financial marketfor long and medium-term funds. It includes instruments, organizations, and institutions, providing medium-term and long-term funds. It excludes institutions that provide short-term funds. The common instruments are debentures, stocks, funds, bonds, public deposits, etc.
Capital markets compose of fund suppliers and fund users. The fund suppliers include households in the form of savings they hold in banks, and institutions such as retirement and pension funds, charitable foundations, non-financial companies, and life insurance companies that generate excess cash. The fund users include non-financial companies, home and motor vehicle buyers, and governments that are financing operating expenses and infrastructure investments.
Capital markets are chiefly used to sell financial products like debt securities and equities. Equities are referred to as stocks, ownership shares in an organization. Debt securities like bonds are interest-bearing IOUs.
The capital markets are divided into primary markets where new bond issues and equity stocks are sold, and secondary markets where existing securities are traded. Nonetheless, Modern economies are driven by capital markets, which move money from individuals who have it to those individuals who need it for productive purposes.
Functions of Capital Markets
The functions of capital markets are listed below:
- Capital markets act as a juncture of linking savers and investors.
- Boosts national income by facilitating the capital movement to be used more profitably and productively.
- Its boosts economic growth.
- Savings mobilization for long-term investments.
- Facilitates securities trading.
- Minimization of information and transaction cost.
- Increases ownership of productive assets across a wide range.
- Swift valuations of financial instruments.
- By trading derivatives, it offers protection against market and price risks.
- Facilitates transaction settlement.
- A reduction in the inefficiency of the capital allocation process.
- Provision of funds on a continuous basis
Capital markets are the best venue for financing companies.A broad spectrum of investment avenues is available to all investors that promote capital creation.
Primary Capital Market
In a primary capital market, a company can sell its new bonds and stocks for the first time in an IPO or initial public offering. The primary market is often addressed as the new issues market. When investors buy securities from primary markets, the company that issued the securities employ an underwriting firm for reviewing it and then create a prospectus to outline the price and other significant details of the securities that are to be issued.
All primary market issues are subjected to strict regulations. Organizations must file statements with SEC or Securities and Exchange Commission and other security agencies. They should wait until their filings are accepted before they can go out publicly.
Small investors and traders cannot buy primary market securities. This is due to the factor that the investment bankers of the companies selling securities want to sell those securities in a short time to achieve the required volume. They have to focus on large investors who can buy securities at once.
Functions of primary markets are:
- Origination: This is the process of examining, evaluating, and processing new project proposals in the primary capital markets. It starts prior to a proposal or issuebeing presented in the market. This process is accomplished with the help of commercial bankers.
- Underwriting:For an issue to be successful, there is a requirement for underwriting firms. These firms guarantee minimum subscriptions. If the issues remain unsold, then the underwriters have to purchase it. However, if all issues have been subscribed, they will have no further liability.
- Distribution:Distributing jobs to dealers and brokers who have direct contact with investors is crucial to the success of issues.
In the secondary market, previously issued securities are sold and purchased. Here, securities are not precisely issued by the organizations to the investors. So, the securities are sold by present investors to other investors. Through providing liquidity to securities of the company, the secondary market indirectly contributes to capital formation. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are secondary markets. In the stock market or stock exchange, analysis of the stock market is a crucial aspect of money-making. Therefore, a stock market analysis course is very helpful in learning the methodology of stock market analysis.
Functions of secondary market are:
- Providing regular information regarding security’s value.
- Provides investors with liquidity for their assets.
- Active and continuous trading.
- Providing a market place.
What are the capital market instruments?
The instruments that are traded in the capital markets include equities, debt securities, derivatives, exchange-traded funds, and foreign exchange instruments.
The equity securities refer to the ownership stake that shareholders hold in an organization. It refers to the investment an individual makes in the organization’s equity stock for becoming the company’s shareholder. Equity holders profit by selling the stocks from capital gains. Moreover, the equity holders also get the ownership of the company and subsequently become one of the company holders.
If the company faces bankruptcy, then the holders can share only the residual interest that is left after the debt holders are paid off. A company’s earnings from its core business operations are usually distributed to its shareholders in the form of dividends.
- Debt Securities
Debt security can be classified into debentures and bonds:
- Bonds: Bonds are referred to as fixed-income instruments essentially issued by the state and central governments, municipalities, and organizations for financing projects and infrastructural developments. Bondcan also be referred to as loaning capital market instrument. Here, the bond issuer in called the borrower. These carry a stipulated lock-in period. Therefore, bond issuers are required to repay bondholders the principal amount on the date of maturity.
- Debentures: Debentures are not backed by any collaterals and thus are referred to as unsecured investment options. The lending process is formulated on mutual trust, soinvestors function as potential creditors of an issuing company or institution.
Derivative instruments are financial products in the capital markets whose values are based on the underlying assets, such as bonds, currency,stocks, and stock indexes. Stocks are mostvalued in a country like India. Even though they are considered a risky affair, if traded practically, they can earn you good profits. If you want to learn the basics of stocks and stock analysis, then you must enrol in a stock analysis course.
The most common type derivative instruments are:
- Futures: Futures are transactions involving the derivatives exchange at a predetermined price on a determined future date.
- Options: Options are a pact between two parties where the buyer has the choice of selling or buying a number of derivatives for a stipulated period of time at a specified price.
- Forward: A forward is a derivative contract that occurs between two parties at a specified price at the contract’s end.
- Interest Rate Swap: This is an agreement between two parties that involves interest rates swapping. Here, both the parties decide to pay each other on their loans, interest rates, in different options, currencies, and swaps.
- Exchange-traded funds
Exchange-traded funds or ETFs are a reservoir of financial resources of investors that are used to purchase various capital market instruments such as stocks, bonds, and derivatives. Most of the ETFs are registered with SEBI. Hence, making it an appealing option for traders and investors with limited expertise of the stock market.
ETFs can be sold easily during equity trading time. ETFs have attributes of mutual funds and shares. They are sold in the stock market produced through blocks in the form of stocks.
- Foreign Exchange Instruments
These are financial instruments represented in the foreign market. It mostly consists of currency derivatives and agreements. They can be distinguished into three groups based on currency agreements: outright forwards, spot, and currency swap.
The best course for Capital Markets
Now that your basics are cleared, you need a more specialized approach to capital markets. For that, we have curated the best capital markets course by Elearnmarkets, an e-learning portal, Online NSE Academy Certified Capital Market Professional (or E-NCCMPcourse). This is an NSE Academy certified course. This programme will provide interested professionals with a comprehensive understanding of the basics of capital markets, investing, currency markets, fundamental and macro-economic analysis, technical analysis, and derivative market strategies.
This course is a steal deal for all capital market enthusiasts who want to ace in capital market terminologies. After you have gained profound knowledge through this course, you can enrol yourself in NCFM courses to strengthen your grip in options trading strategies, banking sector, wealth management, advanced fundamental and technical analysis, and many more.
With fast-paced online learning, you can learn effectively and even clear your doubts in an open forum. The live interactive classes lead to knowledge fortification and stalwart resume.
Acapital markets course is a rudimentary approach to comprehensive capital market learning. If you are considering investing in the capital markets, then learning about the different tools and techniques is a must for earning profits and excelling in the capital markets.