22-12-2012, 05:12 PM
A PROJECT ON CAPITAL MARKET
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CAPITAL MARKET
The capital market is the market for securities, where
Companies and governments can raise long-term funds. It is a market in
which money is lent for periods longer than a year. A nation's capital market
includes such financial institutions as banks, insurance companies, and stock
exchanges that channel long-term investment funds to commercial and
industrial borrowers. Unlike the money market, on which lending is ordinarily
short term, the capital market typically finances fixed investments like those
in buildings and machinery.
Nature and Constituents:
The capital market consists of number of individuals and institutions
(including the government) that canalize the supply and demand for longterm
capital and claims on capital. The stock exchange, commercial banks,
co-operative banks, saving banks, development banks, insurance companies,
investment trust or companies, etc., are important constituents of the capital
markets.
The capital market, like the money market, has three important
Components, namely the suppliers of loanable funds, the borrowers and the
Intermediaries who deal with the leaders on the one hand and the
Borrowers on the other.
The demand for capital comes mostly from agriculture, industry, trade
The government. The predominant form of industrial organization developed
Capital Market becomes a necessary infrastructure for fast industrialization.
Capital market not concerned solely with the issue of new claims on capital,
But also with dealing in existing claims.
Debt or Bond market
The bond market (also known as the debt, credit, or fixed income market) is a financial market
where participants buy and sell debt securities, usually in the form of bonds. As of 2009, the size
of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion [1], of which
the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS (or
alternatively $34.3 trillion according to SIFMA).
Nearly all of the $822 billion average daily trading volume in the U.S. bond market takes place
between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market.
However, a small number of bonds, primarily corporate, are listed on exchanges.
References to the "bond market" usually refer to the government bond market, because of its
size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the
inverse relationship between bond valuation and interest rates, the bond market is often used to
indicate changes in interest rates or the shape of the yield curve.
Market structure
Bond markets in most countries remain decentralized and lack common exchanges like stock,
future and commodity markets. This has occurred, in part, because no two bond issues are
exactly alike, and the variety of bond securities outstanding greatly exceeds that of stocks.
However, the New York Stock Exchange (NYSE) is the largest centralized bond market,
representing mostly corporate bonds. The NYSE migrated from the Automated Bond System
(ABS) to the NYSE Bonds trading system in April 2007 and expects the number of traded issues
to increase from 1000 to 6000.
Besides other causes, the decentralized market structure of the corporate and municipal bond
markets, as distinguished from the stock market structure, results in higher transaction costs and
less liquidity. A study performed by Profs Harris and Piwowar in 2004, Secondary Trading Costs
in the Municipal Bond Market, reached the following conclusions: (1) "Municipal bond trades
are also substantially more expensive than similar sized equity trades. We attribute these results
to the lack of price transparency in the bond markets. Additional cross-sectional analyses show
that bond trading costs decrease with credit quality and increase with instrument complexity,
time to maturity, and time since issuance." (2) "Our results show that municipal bond trades are
significantly more expensive than equivalent sized equity trades.
Participants include:
· Institutional investors
· Governments
· Traders
· Individuals
Because of the specificity of individual bond issues, and the lack of liquidity in many smaller
issues, the majority of outstanding bonds are held by institutions like pension funds, banks and
mutual funds. In the United States, approximately 10% of the market is currently held by private
individuals.
Bond market size
Amounts outstanding on the global bond market increased 10% in 2009 to a record $91 trillion.
Domestic bonds accounted for 70% of the total and international bonds for the remainder. The
US was the largest market with 39% of the total followed by Japan (18%). Mortgage-backed
bonds accounted for around a quarter of outstanding bonds in the US in 2009 or some $9.2
trillion. The sub-prime portion of this market is variously estimated at between $500bn and $1.4
trillion. Treasury bonds and corporate bonds each accounted for a fifth of US domestic bonds. In
Europe, public sector debt is substantial in Italy (93% of GDP), Belgium (63%) and France
(63%). Concerns about the ability of some countries to continue to finance their debt came to the
forefront in late 2009. This was partly a result of large debt taken on by some governments to
reverse the economic downturn and finance bank bailouts. The outstanding value of international
bonds increased by 13% in 2009 to $27 trillion. The $2.3 trillion issued during the year was
down 4% on the 2008 total, with activity declining in the second half of the year.
Bond market volatility
For market participants who own a bond, collect the coupon and hold it to maturity, market
volatility is irrelevant; principal and interest are received according to a pre-determined schedule.
But participants who buy and sell bonds before maturity are exposed to many risks, most
importantly changes in interest rates. When interest rates increase, the value of existing bonds
fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of
existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond
market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating
interest rates are part of a country's monetary policy and bond market volatility is a response to
expected monetary policy and economic changes.
STOCK OR EQUITY MARKET
A stock market or equity market is a public market (a loose network of economic transactions,
not a physical facility or discrete entity) for the trading of company stock and derivatives at an
agreed price; these are securities listed on a stock exchange as well as those only traded
privately.
The size of the world stock market was estimated at about $36.6 trillion US at the beginning of
October 2008. The total world derivatives market has been estimated at about $791 trillion face
or nominal value, 11 times the size of the entire world economy. The value of the derivatives
market, because it is stated in terms of notional values, cannot be directly compared to a stock or
a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority
of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a
comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities
are valued as marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual
organization specialized in the business of bringing buyers and sellers of the organizations to a
listing of stocks and securities together. The largest stock market in the United States, by market
cap is the New York Stock Exchange, NYSE, while in Canada, it is the Toronto Stock Exchange.
Major European examples of stock exchanges include the London Stock Exchange, Paris Bourse,
and the Deutsche Börse. Asian examples include the Tokyo Stock Exchange, the Hong Kong
Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin
America, there are such exchanges as the BM&F Bovespa and the BMV.