Page 7 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Objectives

After studying this unit, you will be able to:
Define Capital market

Explain introduction to new issue market
Discuss functions of new issues market
Describe methods of floating new issues
Explain Stock Exchanges
State reforms in Indian Stock Exchanges

Introduction

In every economic system, some units which may be individual or institutions are
surplus-generating, others are deficit-generating. Surplus-generating units are called savers
while deficit-generators are called spenders. In our country, at spectral level, households are
surplus-generating while corporate and government are deficit generating. This is, however,
true only at an aggregate level. You would definitely come across individual households who
are deficit generating and corporate bodies who are surplus generating at some point of time.
The question that arises here is: What do the surplus-generating units do with their surpluses or
savings? You can now imagine that they have only two alternatives before them. They can
either invest or hold their savings in the form of liquid cash. Holding liquid cash is required to
meet transactionary, or precautionary or speculative needs. The surplus-generating units could
invest in different forms. They could invest in physical assets viz. land and buildings, plant and
machinery or in precious metals viz. gold and silver, or in financial assets viz. shares and
debentures, units of the Unit Trade India, treasury bills, commercial paper etc.
A capital market is a market for securities (both debt and equity), where business enterprises
(companies) and governments can raise long-term funds. It is defined as a market in which
money is lent for periods longer than a year, as the raising of short-term funds takes place on
other markets (e.g., the money market).
1.1 Capital Market

The market where investment funds like bonds, equities and mortgages are traded is known as
the capital market. The primal role of the capital market is to channelize investments from
investors who have surplus funds to the ones who are running a deficit. The capital market
offers both long-term and overnight funds. 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.

There are a number of capital market instruments used for market trade, including equity
instruments, credit market instruments, insurance instruments, foreign exchange instruments,
hybrid instruments and derivative instruments. These are used by the investors to make a profit
out of their respective markets.
All of these are called capital market instruments because these are responsible for generating
funds for companies, corporations, and sometimes national governments.
This market is also known as securities market because long-term funds are raised through
trade on debt and equity securities.

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