Key Insights and Trends of Capital Market
Capital market instruments are: common shares, preferred shares, bonds, debentures etc. Government bonds, shares and bonds of companies are traded in cash in the stock market.
Capital markets consist of individuals or institutions engaged in the collection and distribution of capital. There are many participants in this market, including commercial banks, leasing companies, investment banks, stock exchanges, underwriters, insurance companies and many more.
Example: Bank X gives loan to Y LLC for 6 years. In this case X bank is the supplier of funds and Y LLC is the receiver of funds.
Large companies can raise funds by selling their financial assets like- shares, bonds, or debentures. In this case, organizations are users of capital; and the buyers of shares, bonds or debentures are capital investor.
Stock Market consists of equity securities and debt securities/bonds.
1. Equity Market: Where equity securities like company shares are bought and sold is called equity market. It can be called a market for long-term sources of equity funds, as equity funds are raised through the share’s sale, which can be used by the company before its liquidation.
2. Bond Market: The market in which long-term debt securities – bonds, debentures etc. are bought and sold is called the bond market. Generally, the bond market can be divided into two parts a) Government bond market and b) Corporate bond market.
Instruments of Capital Market
Financial assets or documents that are bought and sold in the stock market are called capital market instruments. Common shares, Preferred shares, Priority shares and Bonds are instruments of the capital market.
1. Common Shares: The main component of the capital market is common shares. A small and equal unit of the authorized capital of a joint-stock company is called a share. A public limited company first raises capital by selling shares. By purchasing such shares, each shareholder acquires partial ownership of the company. The owners of the shares enjoy more benefits and status in terms of rights, responsibilities and duties, but do not have priority at the time of dividend distribution and do not have priority at the time of dissolution of the company and return of capital is called common share. Such share-holders can be candidates for director’s election, can vote in elections, can participate in various meetings of shareholders and can give opinion in decision making. Company board of directors, usually elected by vote of shareholders, manages the company. The dividend rate on common shares is not fixed in advance. Part of the profit is paid as special dividend as decided by the meeting of directors. However, in case of loss, the liability of the shareholders is limited to the value of the shares.
2. Preferred Shares: Another important component of stock market is preferred shares; business organization’s sell this kind of share to raise long-term capital. Preferred shares holders have priority over other shareholders in receiving dividends and return of capital. If there is profit in the company, such shareholders must get dividend at fixed rate. However, they cannot be directors or vote in elections, and do not have the opportunity to express their opinion in decision-making on matters other than those related to their own interests. Usually, no period specified in the case of preferred shares. Since the rate of dividend on preferred shares remains fixed, it is called a fixed income security.
3. Bonds and Debentures: Bonds and Debentures are a component of the stock market which are sold by public limited companies to take long-term debt. Such loan documents include the interest rate, loan amount, loan tenure etc. Bond or debenture holders are creditors of the company. Public limited companies firstly raise the required capital through issue of shares. Later, bonds or debentures are issued for additional capital requirements. Bond holders get fixed rate of interest. For this it is called a fixed income security similar to preferred shares.
More Resources
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