- Businesses require two types of funding for success: short-term working capital and long-term fixed capital. Short-term needs, such as daily operations, are met through loans, promissory notes, and securities issued on the money market. In contrast, long-term funding for expansion or investment is raised through issuing shares, bonds, or debentures on the capital market.
- Capital markets serve as platforms for trading various financial assets, such as bonds, stocks, currencies, etc. They facilitate businesses and entrepreneurs and aid in the growth of small and big businesses. Moreover, they offer investment opportunities for individuals to save and invest for their future.
- There are many different capital market products, some of which we referred to earlier:
- Equity securities
- Commodities
- Debt securities
- Foreign exchange
- Derivatives
ROLE OF CAPITAL MARKET IN ECONOMY
Mobilizing Savings:
- It provides individuals and institutions a platform to invest their savings in various financial assets, ensuring funds are available for businesses and governments to undertake growth-enhancing projects.
Facilitating Investment:
- By issuing stocks, bonds, and other securities, capital markets enable businesses and governments to raise funds for investments in infrastructure, technology, and research, stimulating economic activity, job creation, and innovation.
Capital Formation:
- It facilitates the mobilization of funds from savers to investors, allowing businesses to raise capital for projects, expansion, and innovation, fuelling economic growth and job creation.
Promoting Entrepreneurship:
- Access to capital through capital markets encourages entrepreneurship by providing funding for business ventures, fostering competition, innovation, and economic dynamism
Facilitating Infrastructure Development:
- It is pivotal in financing essential infrastructure projects like roads, bridges, and utilities, contributing to economic growth and enhancing quality of life.
Attracting Foreign Investment:
- Well-functioning capital markets attract foreign investors by offering opportunities to invest in businesses and projects, bringing in additional capital, expertise, and technology that bolster economic development.
Corporate Governance:
- Listed companies in capital markets are subject to regulatory requirements and disclosure norms, which promote transparency, accountability, and good corporate governance.
Public Goods:
- These goods are non-rivalrous and non-excludable. This means that when one person consumes the good, it does not reduce its availability to others, and it’s difficult to exclude anyone from benefiting.
- Examples include national defence, public parks, and street lighting. The government typically provides public goods because private markets have difficulty supplying them efficiently due to the free-rider problem
Primary Market
- The primary market, operating within the broader capital market framework, serves as the initial platform for issuing new securities by entities seeking to raise capital
- Also known as the new issues market, it enables companies, governments, and other entities to raise funds.
- In the primary market, securities are offered to investors for the first time, often through initial public offerings (IPOs) or bond issuances.
- Investors in the primary market include institutional investors, retail investors, and other financial institutions.
How is a company listed in the primary market?
Initial Public Offering (IPO)
- An IPO marks the transition of a privately held company to a publicly traded entity by offering its shares to the public for the first time.
- This process is facilitated through investment banks or underwriters who help the company issue new shares to investors.
- IPOs serve as significant milestones for companies, providing them access to capital from a broad base of investors. This capital can be used for various purposes, such as expansion, debt repayment, or research and development.
- Top IPO in India: LIC (21,000 crores), PAYTM (18,300 crores), CIL (15,200 crores)
- Top IPO in the world: Saudi Aramco – $25.6 billion, Alibaba Group – $21.7 billion, Softbank Corp – $21.3 billion
Follow-On Public Offering (FPO)
- An FPO is a process through which a publicly traded company issues additional shares to the public after the issue of an IPO.
- Unlike an IPO, where a company offers shares to the public for the first time, an FPO involves the sale of existing shares by the company.
- The proceeds from an FPO typically go to the company, allowing it to raise additional capital for various purposes such as expansion, debt repayment, or acquisitions.
- Similar to IPOs, FPOs are typically facilitated through investment banks or underwriters who help price and distribute the additional shares to investors.
Rights Issue
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- A Rights Issue is a method a publicly listed company uses to raise additional capital by offering its existing shareholders the right to purchase new shares at a discounted price.
- This offering is made in proportion to the number of shares already held by each shareholder, typically at a predetermined ratio. Shareholders are given a specific period, known as the subscription period, during which they can exercise their rights to buy new shares.
- Companies often use rights issues to fund expansion plans, repay debt, or strengthen their balance sheets.
Secondary Market
- The secondary market, within the realm of the capital market, functions as a platform for the buying and selling of existing securities, such as stocks and bonds, after their initial issuance in the primary market.
- Often referred to as the stock market or stock exchange, the secondary market provides liquidity to investors by enabling them to trade securities amongst themselves.
- It facilitates price discovery through the forces of supply and demand, thereby reflecting the market’s perception of the value of these securities.
Stock exchange in India
- The Bombay Stock Exchange (BSE):
- It is a cornerstone of India’s financial landscape, serving as Asia’s first stock exchange. It was established in 1875.
- It is the biggest stock exchange in India in terms of number of number of companies listed.
- It has more than 5000 companies listed.
- The benchmark index is Sensex includes the top 30 companies based on market capitalization (M-CAP). They are also called Blue Chip companies.
- National Stock Exchange (NSE)
- The National Stock Exchange of India (NSE) is one of the leading stock exchanges in India. It was established in 1992.
- It is the biggest stock exchange in India in terms of the volume of shares traded daily.
- It has more than 2200 companies listed.
- The benchmark index is Sensex includes the top 50 companies based on market capitalization (M-CAP). They are also called Blue Chip companies.
| Top 5 Indian companies based on M-CAP | |
|---|---|
| 1. | RELIANCE INDUSTRIES Ltd – $231 billion |
| 2. | TCS Ltd – $178 billion |
| 3. | HDFC BANK Ltd – $132 billion |
| 4. | ICICI BANK Ltd – $92.97 billion |
| 5. | BHARTI AIRTEL Ltd – $85.21 billion |
| Top 5 global companies based on M-CAP | |
|---|---|
| 1. | Microsoft – $3.1 trillion |
| 2. | Apple – $2.68 trillion |
| 3. | Nvidia – $2.21 trillion |
| 4. | Saudi Aramco – $2.01 trillion |
| 5. | Alphabet (Google) – $1.84 trillion |
