CAPITAL
MARKETS
Meaning of Capital market
Financial market where borrowing
and lending of long term funds
take place (above 1 year)
Issuers Investors
Individuals or institutions that buy securities to
earn returns.
Entities that raise funds by
Retail Investors: Individual investors who buy
issuing securities. Eg: stocks or bonds for personal investment.
companies issue stocks
Key Institutional Investors: Organizations like mutual
funds, insurance companies that invest large sums
of money.
Participants in .
Capital INTERMEDIARIES Regulators
Entities such as brokers,
Market investment banks that Government agencies (like the Securities
and Exchange Commission in the U.S.) that
facilitate transactions oversee the capital markets to ensure fair
between issuers and trading practices and protect investors.
investors
Importance of Capital Market
Investment
Opportunities:
They provide a platform for investors to diversify their portfolios, invest in different
sectors, and potentially earn higher returns over time
Economic indicator
The performance of capital markets is often seen as an indicator of an
economy. Rising stock prices generally indicate economic growth, while falling
prices may signal economic troubles.
Facilitates Capital
Formation:
Capital markets allow companies and governments to raise funds for
development and expansion, facilitating capital formation.
Types of Capital
Markets Secondary
Primary Market Market
It’s the "new issue" market, where companies, The secondary market is a type of capital market where
governments, or other entities raise capital directly from buying and selling of existing shares take place.
investors by issuing new shares or bonds.
To provide liquidity to the investors.
To raise capital for issuers (companies or governments)
Funds go between investors; the issuer doesn’t receive
Funds go directly to the issuer (company/government) money
More heavily regulated (e.g., prospectus required) Less regulation, mostly based on market rules
Investors face more risk as the company’s future is Risks depend on market conditions and company
uncertain performance
Capital
market
Primary Secondary
market market
over the counter Stock exchange
Offer for Sale public Rights Private
market market
(OFS) offering Issue placement
Initial public Follow-on Qualififed
Preferrential
offering Public Offering Institutional
Allotment
Placement
Types of primary market
1 Initial public
offering
Definition: An Initial Public Offering (IPO) is the first time a company offers its shares to
the public. This usually occurs when a privately-owned company decides to go public
and raise capital by selling shares to individual and institutional investors.
Purpose: To raise funds for expansion, pay off debts, or improve the company’s financial
structure.
Example: A tech startup that has grown significantly may launch an IPO to raise capital
and expand its operations.
2 Follow-on Public
Offering (FPO)
Meaning: Follow-on Public Offering (FPO) happens when a company that is already
publicly listed issues additional shares to the public to raise more capital.
Purpose: To raise additional funds after the company has already gone public through
an IPO.
Example: A company that has already completed an IPO may issue more shares if it
needs more capital for new projects or to pay off debt.
3 Offer for Sale (OFS)
Definition: Securities are not issued directly to the public but are offered for sale through
intermediaries like issuing houses or stock brokers. In this case, a company sells securities at
an agreed price to brokers who, in turn, resell them to the investing public
Purpose: To allow large shareholders (like promoters or private equity investors) to sell part of
their holdings to the public and it is frequently used to meet regulatory requirement of 25%
shares being held by public.
Example: If a private equity firm that holds a large stake in a company wants to exit or reduce
its position, it may sell its shares via an OFS.
4 Rights Issue
Definition: A Rights Issue is when a company offers additional shares to its existing
shareholders, usually at a discounted price. Shareholders have the right to buy these shares in
proportion to their current holdings.
Purpose: To raise funds from current shareholders without bringing in new investors.
Example: If a company needs to raise capital for a specific project, it might offer its
shareholders the option to buy more shares at a lower price.
Preferential
5
Allotment
Definition: Preferential Allotment is when a company issues shares to a specific group of
investors at a price typically lower than the market price. This can include promoters,
strategic investors, or high net worth individuals.
Purpose: To raise capital from selected investors while maintaining control over who buys the
shares.
Example: A company may offer shares at a discount to certain strategic investors who are
willing to provide long-term support to the company.
6 Qualified Institutional
Placement
Definition: Tool used by publicly listed companies to raise capital by selling shares to qualified institutional buyers
(QIBs), such as mutual funds, banks, or insurance companies.
Purpose: QIP is a quicker, easier way for companies to get funds without going through lengthy procedures like
public offerings.
Example: A company wants to open more stores across the country but needs extra money to do so. Instead of
taking a loan or selling shares to the general public, which can take a long time, the company can go to big
investors (like banks or mutual funds) and offer to sell them shares directly. This faster process of getting funds
from these large investors is called QIP.
Types of Secondary market
1 Over-The-
Counter Market
Definition: OTC markets are decentralized and do not have a central location like a stock exchange.
Instead, securities are traded directly between parties, usually through dealers or brokers.
OTC markets are generally subject to less stringent regulations than exchanges.
Benefits: OTC markets allow for more flexibility and access to a wider variety of securities,
including smaller or niche companies that may not meet stock exchange requirements.
Example: A small tech startup that doesn’t meet stock exchange listing requirements might trade
shares OTC.
Types of Secondary market
2 Stock Exchange Market
Definition: A stock exchange is a centralized platform where stocks, bonds, and other securities are
traded. Examples include the New York Stock Exchange (NYSE) or the Bombay Stock Exchange (BSE).
How It Works: Buyers and sellers meet on a regulated exchange where prices are set through supply
and demand.
Benefits: Stock exchanges provide greater security and transparency since trades are regulated and
all information is publicly available.
Example: If you want to buy shares of Vedanta, you go to the NSE to make the purchase.
“The stock market is a roller coaster, not a straight line. Don’t let short-
term fluctuations drive long-term decisions”
Thank you!
KRITIK GUPTA
