Capital Market Instruments - Primary and Secondary

A share is a partial ownership in a company. When a company is formed, the initial capital requirement is fulfilled by partners or investors who own the company. As the company grows, its capital requirements increase. The company can raise capital in various ways like business loans, adding partners, approaching new investors, among others.

1. UNIT III Capital Market Instruments By Dr.M.Devaki Assistant Professor

2. Capital Market Instruments A capital market is a market for securities (debt or equity), where business enterprises and government can raise long-term funds. The capital market includes the securities market and the bond market. Funding instruments traded in the capital markets include debentures, shares, bonds, debt instruments, ETFs, etc.

3. The primary functions of the capital market are Facilitating the movement of capital to productive areas to augment the national income Acting as the link between savers and investors Boosting economic growth Mobilising savings for financing long-term investments Facilitating the trading of securities Reducing the information and transaction cost

4. Equity Capital Market The equity capital market (ECM) refers to the arena where financial institutions help companies raise equity capital and where stocks are traded.  It consists of the primary market for private placements, initial public offerings (IPOs), and warrants; The secondary market, where existing shares are sold, as well as futures, options, and other listed securities are traded.

5. Debentures A debenture is a type of debt instrument issued by companies to raise capital. It is not secured by physical assets or collateral. Debentures promise to pay interest and principal to the debenture holders. Companies issue debentures to investors, and these investors become creditors of the company.

6. Types of Shareholding Shares are broadly classified into two main types—preference and equity.  Preference Shares When an individual holds preference shares, they have a preferential right to: Receive dividends at a fixed rate. Receive repayment of the capital if the company winds up. 

7. Equity Shares All shares that are not preferential shares are equity shares and are also known as ordinary shares. A person who holds equity shares has the right to vote in the company's decisions. As an equity shareholder, you are entitled to receive a claim to any profits paid by the company in the form of dividends. 1. It wants to reinvest the money into the business for growth and/or expansion; or 2. Pay out a part of the profits to shareholders in the form of dividend. 

8. Benefits of Investing in Equity Shares Potential to Earn a High Income Capital appreciation due to the increase in stock price.   Regular income if the company declares dividends .  Protection Against Inflation Diversification Across Assets

9. How to Buy Equity Shares? To invest in the stock market, you need three essential accounts:  Demat Account – to hold the shares in your name. Trading Account – to place buy and sell orders you need a trading account with a stockbroker registered with a stock exchange. Linked Bank Account 

10. There are two ways to invest in stocks: The IPO-way When a company launches shares for the first time, it announces a public listing called an IPO. As an investor, you can apply for an IPO through your net banking account or place bids for the company’s shares via stock exchanges.  Buying from the stock market Apart from the IPO, you can buy or sell stocks around the year on the stock markets by following this process Open a demat account and trading account with a linked bank account. Log in to your trading account. Select shares that you want to purchase. Finalize the price at which you want to buy. Once the transaction is confirmed, transfer the money and complete the transaction.

11. Sweat Equity Sweat Equity Shares  are a specific type of equity share issued by a company to its directors or employees at a discount or for consideration other than cash as a reward for their hard work and contributions to the company. The term "sweat equity" reflects the idea that the employee's or directors' sweat, or labour, adds value to the company, similar to monetary investment. 

12. Features of Sweat Equity Share Issuance for Contributions Other Than Cash Discounted Price Incentive and Reward Employee and Director Benefit Legal and Regulatory Compliance Lock-in Period Performance Measurement

13. Non-Voting Shares A non-voting share is a share in the capital of a company that belongs to a class that has no voting rights. This is distinct from, for example, an ordinary share which gives the shareholder standard rights to vote at shareholder meetings in proportion to their shareholding. On a winding up, the holders of preference shares are usually entitled to any arrears of dividends and their capital ahead of ordinary shareholders. Preference shares are usually non-voting (or only have a vote only when their dividend is in arrears).

14. Share Warrants A share warrant in finance is an instrument that gives the holder the right to purchase or sell the issuing company's shares at a set price. The transaction should occur on a predetermined date or within a particular period. The Different types of Share Warrants: Share Warrants can be classified into two major types Call Warrants Put Warrants

15. Why do companies issue warrants Companies generally issue share warrants for two primary reasons. For Raising Capital To attract or retain talent

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