Introduction- Capital Markets and Depository
1.1 Capital Markets
Markets exist to facilitate the purchase and sale of goods and services. The financial market exists to facilitate sale and purchase of financial instruments and comprises of two major markets, namely the capital market and the money market. The distinction between capital market and money market is that capital market mainly deals in medium and long-term investments (maturity more than a year) while the money market deals in short term investments (maturity upto a year).
Capital market can be divided into two segments viz. primary and secondary. The primary market is mainly used by issuers for raising fresh capital from the investors by making initial public offers or rights issues or offers for sale of equity or debt. The secondary market provides liquidity.
1.2 Capital Market Instruments
Capital market instruments can be broadly divided into two categories namely * Debt, Equity and Hybrid instruments.
* Derivative Products like Futures, Options, Swaps.
Debt: Instruments that are issued by the issuers for borrowing the money from the investors with a defined tenure and mutually agreed terms and conditions for payment of interest and repayment of principal.
Debt instruments are basically obligations undertaken by the issuer of the instrument as regards certain future cash flows representing interest and principal, which the issuer would pay to the legal owner of the instrument. The key terms that distinguish one debt instrument from another are as follows:
* Issuer of the instrument
* Face value of the instrument
* Interest rate and payment terms
* Repayment terms (and therefore maturity period / tenor) * Security or collateral provided by the issuer
Different kinds of money market instruments, which represent debt, are commercial papers (CP), certificates of deposit (CD), treasury bills (T-Bills), Govt. of India dated securities (GOISECs), etc.
Equity: Instruments that grant the investor a specified share of ownership of assets of a company and right to proportionate part of any dividend declared. Shares issued by a company represent the equity. The shares could generally be either ordinary shares or preference shares.
Hybrids: Instruments that include features of both debt and equity, such as bonds with equity warrants e.g. convertible debentures and bonds.
Derivatives: Derivative is defined as a contract or instrument, whose value is derived from the underlying asset, as it has no independent value. Underlying asset can be securities, commodities, bullion, currency, etc. Derivatives which are generally traded in the capital market are:
* Futures: Futures are the standardized contracts in terms of quantity, delivery time and place for settlement on a pre-determined date in future. It is a legally binding agreement between a seller and a buyer, which requires the seller to deliver to the buyer, a specified quantity of security at a specified time in the future, at a specified price. Such contracts are traded on the exchanges.
* Options: These are deferred delivery contracts that give the buyer the right, but not the obligation to buy or sell a specified security at a specified price on or before a specified future date.
* Swaps: It is a derivative in which counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (or coupon) payments associated with the bonds. Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap.
1.3 Stock Exchange
* In the secondary market the investors buy / sell securities through stock...