Wednesday, February 4, 2015

Capital Market - Part I

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While Money Market deals with short-term (up to 1 year) funds, Capital Market deals with medium and long term (more than 1 year) funds. It refers to all facilities and institutional arrangements for borrowings and lending medium and long term funds.

Borrowers - private business corporations, PSUs, government, etc.
Lenders - individual, institutional investors, banks, financial institutions, government, etc.

Capital Market
Capital market is the part of a financial market, where companies that need capital for its business purpose, issue stocks or bonds to the investors and raise money. Investors invest in capital market to earn profit from its investment.

They have two options for investment - either buy equity (stock) instrument, or debt (bonds, debentures) instrument. (Refer my previous post on Equity & Debts)

Primary and Secondary Market
Sometimes, a company directly approaches a market to get some investment and raise capital. For this purpose, they can work with lead managers or merchant bankers, who help them to raise money.
If investors directly provide money to the company (meaning, company raises capital directly from investors), then it means that the trading is in Primary Market.

After an investor has shares or bonds (whatever instrument he/she bought from the company in Primary Market), can sell his/her shares/bonds to other investors. All consequent buying or selling will be traded in the Secondary Market (meaning, investors doesn't buy instruments directly from the company in a Secondary market).

Issues in Primary Market
There are several type of Issues in a Primary market -

1.  Initial Public Offering (IPO) - A company when first time wants to raise money from the market, issues shares to the general public (meaning, previously shares held only by the founding members, or the company itself). This first time share issue is known as Initial Public Offering (IPO).
After IPO, the company becomes a public company, because the general public is also the shareholder/stakeholder of the company. It is now listed in one or more stock markets for trading in Secondary Market.

2. Follow-On Public Offering (FPO) - After sometimes (after IPO), suppose, the company again wants to issue shares (shares held by company) to the public, then it will be known as Follow-On Public Offering. Note that this is done in Primary Market (investors buy directly from company), not in Secondary market (investors buy from other investors, or stock markets)

Confusion - Don't confuse FPO as Secondary Market offering. As I discussed earlier, that Secondary market deals only within the investors, not with the company, whereas, IPO and FPO work between the company and the investor (hence in Primary Market).

Company in need of capital, can raise money, by issuing shares to its existing shareholders, or to non-shareholders. 

3.  Rights Issue If the company issues shares to existing shareholders in per share basis, then the percentage stake will not be diluted. This is known as Rights Issue.
For an example, suppose a company issues 1:3 Rights Issue @ Rs. 50/share. It means an existing shareholder having 3 shares already can buy 1 new share at Rs. 50. Note that the percentage stake is not diluted, because every shareholder again holds the same percentage of shares.

4.  Preferential Issue - If the company issues shares to some other selected (preferred) people who is not an existing shareholder, then it will be known as Preferential Issue. Note that percentage stake is diluted here, because new person becomes shareholder.

Trade in Secondary Market
After the IPO, investors have the securities they bought, and the company has the money/capital. The company then lists the securities on one or more Stock Exchanges (like BSE, NSE, Nasdaq, etc).
Companies apply to the respective stock exchanges to get their stocks listed, after paying a listing fee. Listing facilitates the subsequent buying and selling of the securities through current and prospective investors. This enables investors to make profits, reduce risks, invest in prospective growth areas, and so on (and making a lot of speculations! ups and downs in stock market)

Note that in Secondary market, investors can buy and sell their stocks from and to other investors.

Some Stock Exchanges -
Bombay Stock Exchange (BSE), National Stock Exchange (NSE), New York Stock Exchange (NYSE), NASDAQ, Japan Exchange Group, Euronext, London Stock Exchange, Hong Kong Stock Exchange, Deutsche Bourse, TMX Group, etc.

Hope this article will help to clear your doubts! Also you comment in the comment section below.
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Happy learning!

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