Introduction to Capital Market
The capital market is a segment of the financial system where long-term funds are raised and traded. It connects savers, who have surplus funds, with borrowers, such as companies and governments, who need funds for long-term investment and growth. Instruments traded in the capital market generally have a maturity of more than one year.
Understanding capital market terminology is essential because these terms are frequently tested in objective questions, case studies, and descriptive answers.
Primary Market
The primary market is the market where new securities are issued for the first time. When a company raises money directly from investors by issuing shares or debentures, it does so through the primary market. The funds raised in this market go directly to the issuing company.
In simple words, the primary market helps companies to mobilise fresh capital for expansion, modernization, or repayment of loans. Investors in the primary market buy securities at the issue price, not at a market-determined price.
Initial Public Offering (IPO)
An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time and becomes a public company. After an IPO, the shares of the company are listed and traded on a stock exchange.
Remember that:
- IPO is part of the primary market
- It helps companies raise equity capital
- Investors get an opportunity to become part owners of the company
Follow-on Public Offer (FPO)
A Follow-on Public Offer (FPO) refers to the issue of additional shares by a company that is already listed on a stock exchange. Unlike an IPO, an FPO is not the first public issue.
FPO is used by companies to:
- Raise additional funds
- Reduce debt
- Meet expansion requirements
Secondary Market
The secondary market is the market where already issued securities are bought and sold among investors. Stock exchanges like BSE and NSE provide the platform for secondary market trading.
In the secondary market:
- The issuing company does not receive funds
- Prices are determined by demand and supply
- Liquidity is provided to investors
This market plays a crucial role in price discovery and investor confidence.
Stock Exchange
A stock exchange is an organised marketplace where securities such as shares, debentures, bonds, and derivatives are traded. In India, the major stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Stock exchanges ensure:
- Transparency in trading
- Investor protection
- Fair price discovery
Equity Shares
Equity shares represent ownership capital of a company. Equity shareholders are the real owners of the company and enjoy voting rights. They are entitled to dividends, which depend on the company’s profitability.
However, equity shares carry higher risk, as dividends are not fixed and capital repayment is not guaranteed.
Preference Shares
Preference shares are those shares that enjoy preferential rights over equity shares in respect of:
- Payment of dividend
- Repayment of capital at the time of liquidation
Preference shareholders usually do not have voting rights and receive a fixed rate of dividend.
Debentures
Debentures are long-term debt instruments issued by companies to raise funds. Debenture holders are creditors, not owners, and receive fixed interest.
Debentures may be:
- Secured or unsecured
- Convertible or non-convertible
Remember that debentures carry lower risk than equity.
Bonds
A bond is a fixed income instrument issued by governments, public sector undertakings, or companies. Bonds promise:
- Fixed interest payments
- Repayment of principal on maturity
Government bonds are considered low-risk investments.
Face Value
The face value is the nominal value of a security as mentioned on the certificate. For example, the face value of an equity share in India is generally ₹10 or ₹1.
Face value is important for:
- Dividend calculation
- Accounting purposes
Market Price
The market price is the price at which a security is traded in the secondary market. It constantly changes based on:
- Company performance
- Market sentiment
- Economic conditions
Dividend
A dividend is a portion of the company’s profits distributed among shareholders. Dividend is usually expressed as a percentage of face value.
Equity dividend is not guaranteed, while preference dividend is usually fixed.
Capital Gain
Capital gain arises when a security is sold at a price higher than its purchase price. Capital gains may be:
- Short-term
- Long-term
Tax treatment differs based on the holding period.
Bonus Shares
Bonus shares are additional shares issued to existing shareholders free of cost, in proportion to their existing holdings. Bonus shares are issued out of reserves, not cash profits.
Rights Issue
A rights issue is an offer made to existing shareholders to buy additional shares at a concessional price in a fixed ratio. It helps companies raise funds while protecting existing shareholders from dilution.
Bull Market
A bull market refers to a market situation where prices of securities are rising or expected to rise. It reflects:
- Optimism
- Economic growth
- High investor confidence
Bear Market
A bear market is a market condition where prices are falling continuously. It indicates:
- Pessimism
- Economic slowdown
- Weak investor sentiment
Market Capitalisation
Market capitalisation is the total market value of a company’s outstanding shares. It is calculated as:
Market Capitalisation = Market Price per Share × Number of Outstanding Shares
Companies are classified as large-cap, mid-cap, or small-cap based on market capitalisation.
Securities and Exchange Board of India (SEBI)
SEBI is the regulatory authority for the capital market in India. It was established to:
- Protect investors
- Promote market development
- Regulate market intermediaries
SEBI plays a central role in ensuring fair and transparent markets.
Conclusion
The capital market uses a wide range of terms that reflect its structure, instruments, participants, and functioning. A clear understanding of capital market terminology helps in analysing investment products, understanding market behaviour, and answering exam questions confidently.