OVERVIEW OF CAPITAL MARKETS
Capital Markets acts as a platform that enables investors holding capital and companies seeking capital to meet.
But why do companies require capital?
Companies might want to grow their business, expand, or sustain their business so, capital markets give the companies the platform required for the companies to get the public money.
Example 1: If the company requires 100 crore to expand their business, then they have an option of tapping the capital market.
COMPONENTS OF CAPITAL MARKETS
Company raises capital either through equity or debt mode.
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| Equity vs Debt |
KEY LEARNING:
Returns from the debt are comparatively lesser but the risk is minimal.
FUNDAMENTALS OF EQUITY
What is a stock?
A stock represents a share in the company and the investor is known as the shareholder.
Stock represents ownership in the company
Example:
Miss. Velma runs a beauty salon and she needs to expand her business by getting a new office space and hire new employees.
Let us consider that she needs a capital of Rs. 30,00,000.
She has following options:
1. LOAN
2. INVESTORS
Miss Velma's salon gets invested by her nine friends with Rs. 3,00,000 each.
Hence, the capital is raised through the equity mode and it is know as Share Capital.
After: Miss Velma is the owner of the company with nine others.
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| Pattern of company ownership |
Let us understand the gain after getting investors for the company
Let us assume that the company has being doing really well after 3 years and the business has being valued at Rs. 50,00,000.
The value of investment of every shareholder will be :
50,00,000/ 10 (owners)= Rs. 5,00,000 Each
Now, each shareholder gets Rs. 5,00,000 by investing Rs. 3,00,000 which indicates PROFIT.
This is know as PRIVATE PLACEMENT of shares which means the public cannot buy the shares of the company.
HOW AND WHEN A PRIVATE COMPANY BECOMES PUBLIC?
Let us assume that Miss Velma's salon has now become a very popular salon and she is now willing to expand her business.
She needs an investment of Rs. 60,00,000 now.
She now decides tapping the stock market and this requires IPO filling.
IPO (Initial Public Offering) is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as founders, their families and friends) and professional investors (such as venture capitalists or angel investors).
IPO (Initial Public Offering) is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as founders, their families and friends) and professional investors (such as venture capitalists or angel investors).
The IPO filing is a long process and needs the assistant of an Investment Banker.
Reference: http://www.angelbroking.com/ipo/what-ipo-process
An Investment Banker helps in preparing the document, which is known as 'Red Herring Prospectus'.
In the simple terms, it contains information about the company's performance, future plans, etc and it is filed with SEBI
SEBI (Securities and Exchange Board of India) is the regulator for securities in India.
If all the information is in the place - It is approved.
Post approval the prospectus is made public by publishing it in various leading newspapers. Once the company gets necessary approvals of the IPO, urging them to invest money in the company.
The people read about the IPO, and if interested they may be allocated to subscribe the issue.
Once the shares are allocated, the company stock becomes listed in stock exchange.
Summary:
- Velma's company which was earlier a private limited company became public through the IPO route.
- As the company is now owned by the public at large, she owes money to the investors and her liabilities are more towards the investors. This is the example of "PRIMARY MARKET TRANSACTION" wherein for the first time a company raises money from the investors.
- Velma's company shares have now being listed and sold to the public and the investors can freely share their shares to the other investors, who want to buy and sell the shares.
- Once the shares are being brought and shared in the market are set to be freely traded. This is known as "SECONDARY MARKET TRANSACTION".
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| Primary Market Transaction |
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| Secondary Market Transaction |
Examples of Public Limited Companies in India:
Example: Consider the example of Hindustan Unilever Limited. The below graph shows continuous fluctuations in six months which is from Rs. 432 to Rs. 533. The Face Value is Rs. -1.00 in the last six months.
1. Infosys
2. Tata Consultancy Services
3. Hindustan Unilever Limited
EQUITY TECHNICAL TERMS:
Face Value:It is the original price of the stock shown on the certificate.
Example: Miss Velma got her shares listed on the stock exchange.
When she issued shares they were done in certain Face Value (FV) which is the original price of the stock shown on the certificate.
Face Value is constant for a few years unless the company decides to opt for a stock split.
Unlike FV of shares, market price of the share keeps on changing and it depends on the market fluctuations.
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| The market price is reflected on the price of the shares. |
- Face Value is merely the book value and Market price reflects the performance of the company.
- Market Price mirrors the performance of the company.In the generic way, increase in market price indicates good health of the company.
FACE VALUE > MARKET VALUE= Bad Health of the company.
FACE VALUE < MARKET VALUE= Good Health of the company.
UNDERSTANDING THE STOCK QUOTES:
Stocks are traded continuously from Monday to Friday and the information of the stocks are continuously updated on various websites dedicated to stock markets.
How to get the stock quotes?
They are readily available on websites like Google Finance, Yahoo Finance, Money Control, etc.
Example: Given below is the snapshot of the stock on the certain day of Tata Steel.
322.10 is the closing price of the stock that is the last stock traded on the given day in the market
It shows the opening price of the stock in the market for the particular day
During the trading course of the day the stock reached the maximum of Rs. 327.70
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The stock went to the low of Rs. 320.70 during the particular day
In the preceding 52 week (1 year) stock reached high of Rs. 482.00 and the low of Rs. 320.70
Volume 760606 means 7.6 L shares were traded in the day
The graphical representation of the stock:
Tata Steel was traded at the opening price of Rs. 327.00 during the course of the day and it reached the price of Rs. 327.70 and the minimum of Rs. 320.70 before closing at the price of Rs. 322.10
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DIVIDENDS STOCK BONUS
Dividends are the payments made by the company to his investors as the reward.
Dividends can be reinvested or some portion of payout is given as dividend to the investors.
Fundamentally it is dividing the company's profit among the share holders.
Not all the profit is declared as dividend.
Dividends are declared in the form of percentage.
EXAMPLE: BOSCH declares the dividend of 600%
Dividend is multiplied by the face value of the share
Therefore, each investor gets Rs. 60 per share.
More the number of shares, more the dividend you earn.
