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Efficient Capital Market

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Title: Efficient Capital Market


1
Efficient Capital Market
  • An efficient capital market is a market where the
    share prices reflect new information accurately
    and in real time. Capital market efficiency is
    judged by its success in incorporating and
    inducting information, generally about the basic
    value of securities, into the price of
    securities. This basic or fundamental value of
    securities is the present value of the cash flows
    expected in the future by the person owning the
    securities

2
  • The fluctuation in the value of stocks encourage
    traders to trade in a competitive manner with the
    objective of maximum profit. This results in
    price movements towards the current value of the
    cash flows in the future. The information is very
    easily available at cheap rates because of the
    presence of organized markets and various
    technological innovations. An efficient capital
    market incorporates information quickly and
    accurately into the prices of securities

3
  • In the weak-form efficient capital market,
    information about the history of previous returns
    and prices are reflected fully in the security
    prices the returns from stocks in this type of
    market are unpredictable.

4
  • In the semistrong-form efficient market, the
    public information is completely reflected in
    security prices in this market, those traders
    who have non-public information access can earn
    excess profits. In the strong-form efficient
    market, under no circumstances can investors earn
    excess profits because all of the information is
    incorporated into the security prices.

5
  • The funds that are flowing in capital markets,
    from savers to the firms with the aim of
    financing projects, must flow into the best and
    top valued projects and, therefore, informational
    efficiency is of supreme importance. Stocks must
    be efficiently priced, because if the securities
    are priced accurately, then those investors who
    do not have time for market analysis would feel
    confident about making investments in the capital
    market. Eugene Fama was one of the earliest to
    theorize capital market efficiency, but empirical
    tests of capital market efficiency had begun even
    before that.

6
Capital Market Regulations
  • Regulations are an absolute necessity in the face
    of the growing importance of capital markets
    throughout the world. The development of a market
    economy is dependent on the development of the
    capital market. The regulation of a capital
    market involves the regulation of securities
    these rules enable the capital market to function
    more efficiently and impartially.

7
  • A well regulated market has the potential to
    encourage additional investors to partake, and
    contribute in, furthering the development of the
    economy. The chief capital market regulatory
    authorities worldwide are as follows U.S.
    Securities and Exchange Commission
  • Canadian Securities Administrators, Canada
  • Australian Securities and Investments Commission
  • Securities and Exchange Commission, Pakistan
  • Securities and Exchange Board of India
  • Securities and Exchange Commission, Bangladesh
  • Securities and Exchange Surveillance Commission

8
  • Securities and Futures Commission, Hong Kong
  • Financial Supervision Authority, Finland
  • Financial Supervision Commission, Bulgaria
  • Financial Services Authority, UK
  • Comision Nacional del Mercado de Valores, Spain
  • Authority of Financial Markets
  • The United States Securities and Excha

9
  • The United States Securities and Exchange
    Commission (SEC), established in 1934, has the
    responsibility of regulating and controlling the
    securities industry/stock market, and enforcing
    the federal securities laws.

10
  • Public companies have to keep in compliance with
    the statutory requirements by submitting
    quarterly and annual reports to the SEC
    companies involved in fraudulent activities are
    brought to task. These submitted reports are
    essential, as investors require them in order to
    make crucial decisions before investing in the
    capital market

11
  • The Canadian Securities Administrators (CSA) is
    responsible for the development of the Canadian
    Securities Regulatory System and regulates the
    capital market of Canada, protecting investors
    from fraudulent and nefarious activities. The CSA
    looks to establish a just, clear and dependable
    capital market system.

12
Capital Market Liberalization
  • Capital market liberalization, a result of
    globalization and trade liberalization, refers to
    the relaxation of government restrictions in the
    market. Not only government entities, but also
    private entities participate its functioning, and
    investors around the world are able to invest in
    the shares and bonds of other countries.

13
  • Worldwide economies, particularly in the
    developing countries, are opening their doors to
    foreign investments and capital, enhancing global
    competitiveness. Unbound circulation of goods
    and services within and between countries results
    in an increase in the circulation of money,
    causing a positive effect on the capital market.

14
  • Non-tariff and tariff trade barriers are
    eliminated, and avoidable legislations and taxes
    are not imposed as a result. Not only do parties
    involved in a trade stand to benefit from the
    effects of liberalization, but gains in
    productivity and the maximization of the
    economy's general efficiency are also a result.
    As well as free access that can be had to the
    market's information, there is a complete absence
    of policies that hamper trade and labor, and
    capital is allowed free flow under the
    liberalized market.

15
  • For a long period of time, the development of
    open capital markets has been a prerogative
    worldwide and several economies have made huge
    developments by opening up their markets. The
    whole capital market has now become a global
    common market, with globalization ensuring hassle
    free imports and exports. Corporations and
    companies are able to receive external
    investments and, along with individuals, can gain
    access to foreign goods and services.

16
Capital Market Services
  • Capital market denotes the market where
    securities are traded. This market is further
    divided in several types known as debt capital
    market and equity capital market. The capital
    market services provide the investors with the
    opportunity to enter in this market without any
    real problem. This market has the potential to
    produce high yields and at the same time, this
    market can also produce high risk factors

17
  • There are several companies involved in providing
    the capital market services to the investors. The
    main services that are provided by these
    companies are stock broking services and
    consultancy services. Today, most of the equity
    capital market trades are done online. There are
    several companies that are providing these
    facilities to the investors.

18
  • Again, the stock broking services which are
    provided by many companies are of immense use for
    a large number of investors and especially the
    newcomers need these services for their own sake.
    The stock broking firms help the investor to
    select the appropriate stocks which is the
    primary condition of this market. These brokers
    also help the customers to make their investment
    portfolio in such a manner that the portfolio can
    adjust itself with the sudden changes of the
    market.

19
  • At the same time there are certain software
    companies that are providing capital market
    services to the investors, but in a different
    manner. Actually these software companies help
    the online companies to make their services much
    easier and smooth. At the same time, the software
    companies are also concerned about adding extra
    amount of pace in the process because speed alone
    can emerge as as decisive factor in the capital
    market

20
  • Again there are a number of online portals which
    are providing capital market services to the
    investors. These portals are providing all the
    latest information and changes regarding the
    market. These information are very important from
    the investors point of view because constant
    update of information regarding the market can
    help an investor to raise his profits and at the
    same time, it also helps the investor to reduce
    the risk factor.

21
Capital Market Research
  • Capital market research is an essential activity
    for companies because it enables them to provide
    products and services that are useful for the
    targeted consumers. Such a focused and logical
    approach enhances the profit making possibilities
    of companies. The companies can earn more
    dividends and at the same time minimize risks as
    a result of research on capital markets.

22
  • One big advantage of capital market research is
    establishment of proper communication between the
    companies and the customers. The customer
    reactions to various services provided by the
    companies can be measured as a result of capital
    market research. The companies can thus do away
    with wrong policies and look to take the right
    steps

23
  • The companies can also locate the right
    opportunities through market research. If the
    company undertakes capital market research before
    launching a new product or service then it stands
    a better chance of getting a good return.

24
  • Risk minimization is another reason for
    undertaking capital market research. Through this
    research, the exact needs of the market and the
    general public can be gauged and the products and
    services can be made very demand oriented. The
    companies can also analyze whether they are
    making progress in the right direction

25
  • Capital market research should be done as early
    as possible in order to avoid problems in the
    future. Before investing in the stock market,
    stock market research needs to be undertaken.
    Research involves finding the companies and stock
    prices that would best suit the financial
    situation of the investor

26
  • The company profile needs to be studied and the
    size of the company is another important
    parameter of stock market investment research.
    Gathering information on the history of the
    company is another facet. Its history of profits
    and popularity and its performance in the past
    must be analyzed before investing in the shares
    of that company.

27
  • Research on the products and services of various
    companies is also very important. Investments
    should be made for the long term. This minimizes
    risk and increases profitability. Lastly,
    investment should be made wisely and regularly
    and this results from a good capital market
    research.

28
Secondary Capital Market
  • The secondary capital market deals with those
    securities that are already issued in an initial
    public offering in the primary market. Typically,
    the secondary markets are those where previously
    issued securities are purchase
  • In the secondary capital market, the securities
    are generally sold by and transferred from one
    investor to another. Hence, the secondary capital
    market needs to be highly liquid in nature.hased
    and sold.

29
  • A high transparency for the secondary market
    trading is also required. With the advancement of
    the technology, the trading concept in secondary
    market has changed substantially. In the earlier
    days, the investors needed to meet at fixed place
    in order to carry out the transactions. But now
    trading in secondary capital market has become
    much easier for the investors.

30
  • The capital market handles the trading of stocks
    and bonds. The secondary bond markets play a
    market place for the bonds that are already
    issued in the primary market while the secondary
    stock market trades those stocks that are already
    issued by the issuers. The treasury bills
    secondary market handles the trading of treasury
    bills.

31
  • The secondary market trading is vital for the
    capital market. A study in the secondary market
    trend can give some information on the investor's
    preference for liquidity. It means whether the
    investors want to invest their money for a short
    period of time or a longer period.

32
  • It has been seen that the investors in the
    capital market do not prefer to put their money
    for the long term investments. But the secondary
    market investors, however, can compensate their
    investments with proper strategy.

33
  • The secondary market value of a stock or a bond
    is different from their face value. This happens
    due to the fluctuating interest rates. The resale
    value of the bonds in the secondary market is
    based on the interest rates at that very time
    when the sale goes through. In a typical
    secondary market, when the interest rate falls,
    the bond value goes up while when the rate rises,
    the bond value goes down.

34
  • Capital market trends can be sub-divided into
    primary, secondary (short-term), and secular
    (long-term) trends. A technical analysis assumes
    the fact that movements of market prices follow a
    particular trend. They are periods when buyers
    consistently outnumber sellers in other words,
    the bulls outnumber bears.

35
  • Primary trends include bull markets and bear
    markets. The bull market is a situation where
    investors buy in order to increase capital gains
    in the future. In a bear market, on the other
    hand, the investors anticipate losses and
    therefore they are obliged to sell. Price
    fluctuation is an important tendency of an open
    market. The Gross Domestic Product(GDP) and stock
    prices are on the rise during a bull market. A
    bear market exhibits negative trends it can also
    be a prelude to recession.

36
  • Secondary market trends refer to price changes
    within a primary trend. These price changes are
    not permanent. A temporary decrease in price
    during a bull market is a correction. During
    correction, the price drop is normally 10 to
    20. The same percentage increase is experienced
    during the time of a bear market rally. This
    refers to a transient increase in price during
    the time of a bull market.

37
  • Secular market trends are long-term. They usually
    remain for a period of five to twenty five years.
    Many primary trends sequentially arranged result
    in a secular market trend. In such case, the bull
    markets are bigger and a bear market does not
    erase the gains of the previous bull market. In
    secular bear markets, the duration of a bull
    market is smaller.

38
Capital Market Reform
  • Capital market reform enables the capital markets
    to embrace new ideas and techniques affecting the
    capital market. Capital market liberalization is
    one such capital market reform that is adopted by
    various countries to strengthen their economy.

39
  • A capital market is a place that handles the
    buying and selling of the securities. This is the
    ideal place where both the governments and
    companies can raise their funds. The capital
    markets of all the countries have undergone a
    number of reforms in the history. Economic
    theories are made and implemented to reform the
    functionalities of the capital market. The prime
    objective behind all the policies and reforms was
    obviously to strengthen the capital market of a
    particular country as much as possible.

40
  • It has been always a big question to the
    economists whether to allow or not to allow the
    foreign investments in the country. Packaged with
    both advantages and disadvantages, the
    liberalization of the capital markets has always
    been controversial. In the 1980s and 1990s when
    the US Treasury and International Monetary Fund
    (IMF) tried to push world-wide capital-market
    liberalization, there had been enormous
    opposition. Economists were not in the support of
    free and unfettered markets.

41
  • Now, when the capitalist countries, developing
    capitalist countries, underdeveloped countries
    and a large number of socialist countries have
    nodded their support to the capital market reform
    and capital market globalization, the global
    capital market has evolved in a new identity. The
    concept of capital market is not restricted to
    the share and bond trading in the developed
    capitalist countries only but is equally
    influenced by the capital markets of developing
    and underdeveloped countries as well.

42
  • Now the economic or financial change in one
    country can affect the capital market of other
    country in real time. Almost all the countries
    are now exposed to the inter-country trades and
    inter-country investments. The use of internet
    and electronic media has added some more
    feasibility to the practice. Exchange of
    information is fast and accurate with internet.
    Another advantage of this system is that it
    brings the entire world in a single place. The
    capital market is one of the industries that
    enjoy the maximum facility of the internet
    service.

43
Capital Market Investment
  • The capital market investment makes the investors
    to buy or sell securities in the capital markets.
    The stock market and bond market are types of
    capital markets where investors can trade in
    stocks and bonds. The investments in the capital
    market may be either in the bonds or stocks.

44
  • Investments in the stocks or bonds may be either
    investing in the new issues or in the existing
    securities. The primary capital market handles
    the trading and investments in the new issues
    while the secondary capital market takes care of
    the trading of existing securities. There are a
    number of financial regulators that monitor the
    capital market dealings in order to protect the
    investors from fraud. U.S. Securities and
    Exchange Commission is one such financial
    regulator that regulates the capital markets
    situated in their designated countries for the
    best interest of the investors

45
  • Stock Investment
  • The investment in stocks may in six different
    styles. Depending on the needs and reasons of the
    investors, the efficiency of the investment is
    estimated. There are some investors who depend on
    the advice of other people while purchasing or
    selling a particular stock.

46
  • There are technical investors who spend time in
    studying the stock patterns before trading any
    stock. The economist investors take their
    decision of stock trading depending on the
    economic forecasts. They are in the nature to
    take risks and get benefited in return following
    an efficient market hypotheses. There are some
    other types of investors who rely on the
    information given by the researchers, vendors and
    trade executives to make investment in the stocks

47
  • There are value investors who try to value the
    stock independently of its market price. Finally,
    there are conscious investors who depend on their
    own measurements and beliefs while making any
    stock investment. Bond Investment

48
Bond Investment
  • Bond investment is different from that of stock
    investment. Bond investment is investing in the
    debt instrument that is issued by a company or
    government. The bond investor is actually lending
    money to the company while in return is promised
    to be paid the full principal amount plus a fixed
    periodic payout. The yield on the bond is
    calculated by putting together the final
    principal and total payouts received. The yield
    is the effective interest rate for the tenure of
    the bond.

49
Capital Market Assumptions
  • Asset allocation is one of the most important
    decisions related to investment in the capital
    market. There are a number of risk factors
    related to these investments, and because of this
    appropriate capital market analyses are
    necessary. There are firms which provide capital
    market investment solutions to investors, each
    making their own risk and return calculations, or
    capital market assumptions.

50
  • These assumptions are followed strictly when
    making suggestions to the clients regarding the
    asset allocation. Many companies also provide
    their clients with their capital market
    assumptions so that the clients can evaluate
    their own investment decisions

51
  • Of course, capital market assumptions cannot be
    permanent and thus need to be changed from time
    to time. The market prices of different
    investment instruments change very rapidly, and
    with this rapid change the level of risk also
    changes. Different consultation companies use
    different techniques to get their perfect capital
    market assumptions. However, most companies
    concentrate on valuations because they can
    provide the most accurate capital market
    assumptions for the future.

52
  • Other factors useful in making capital market
    assumptions are the ratio between the price and
    earning of the particular asset, the dividend
    yield, the interest rates, and the growth rate of
    the assets.

53
  • Apart from the internal factors of the capital
    market, there are also macroeconomic trends that
    are related to making capital market assumptions.
    These include the level of inflation, changes in
    the Gross Domestic Product (GDP), and increases
    or decreases in the unemployment rate.
    International external factors related to the
    capital market which play a major role in shaping
    capital market assumptions too include taxation,
    foreign denominations, and decisions of national
    regulators.

54
Capital Market Transactions
  • The capital market transactions are made while
    trading in the capital market securities.
    Stocks and bonds are the two types of
    securities where the capital market investments
    are done. Capital market transactions are
    monitored by the financial regulatory bodies.

55
  • A typical capital market includes the trading of
    securities. This is also the ideal market place
    for the companies and governments to raise funds.
    There are financial regulatory bodies in every
    country that monitor and regulate the capital
    market transactions in order to protect the
    investors from being cheated.

56
  • U.S. Securities and Exchange Commission,
    Australian Securities and Investments Commission,
    Canadian Securities Administrators, Financial
    Services Authority (UK) and Securities and
    Exchange Board of India are some of the major
    financial regulators that regulate the capital
    market transactions in their respective
    countries.

57
  • The investment in the capital market can be done
    either in the new issues or in the existing
    securities. The primary capital market controls
    the new issue transactions while the secondary
    capital market takes care of the trading of the
    existing securities. The corporations, banks or
    governments release stocks and bonds in the
    capital market in order to raise the long-term
    funds. The individual investors, companies,
    agencies and corporations can invest in these
    stocks and bonds either by purchasing or selling
    them.

58
  • The trading of stocks and bonds in the capital is
    not easy for the novice and not even for the
    seasoned investors. Its difficult to predict the
    trends of a capital market. Every investor
    wants to play safe with their investments. There
    are financial advisers available to guide the
    investors telling them where to invest and where
    not to. There are stock brokers also who are
    experienced and eligible to guide people with
    stock and bond investments.

59
  • The capital market transactions are done by the
    brokers who are registered with the exchange to
    carry out the trading on behalf of their clients.
    Any individual cannot just walk in the stock
    exchange and invest on the stocks or bonds. He
    must have to go through the brokers in order to
    make any kind of transaction in the capital
    market.

60
Capital Market Risk
  • The capital market risk usually defines the risk
    involved in the investments. The stark potential
    of experiencing losses following a fluctuation in
    security prices is the reason behind the capital
    market risk. The capital market risk cannot be
    diversified.

61
  • The capital market risk can also be referred to
    as the capital market systematic risk. While an
    individual is investing on a security, the risk
    and return cannot be separated. The risk is the
    integrated part of the investment. The higher the
    potential of return, the higher is the risk
    associated with it. The examination of the
    involved in the capital market investment is the
    one of the prime aspects of investing. It can be
    easily said that the risk distinguishes an
    investment from the savings.

62
  • The systematic risk is also common to the entire
    class of liabilities or assets. Depending on the
    economic changes the value of investments can
    fall enormously. There may be some other
    financial events also impacting the investment
    markets. In order to give a check to the capital
    market risk, the asset allocation can be fruitful
    in some cases. Any investment in stocks or
    bonds comes with the following types of risks.
    Market Risk
  • Industry Risk
  • Regulatory Risk
  • Business Risk

63
  • The market risk defines the overall risk involved
    in the capital market investments. The stock
    market rises and falls depending on a number of
    issues. The collective view of the investors to
    invest in a particular stock or bond plays a
    significant role in the stock market rise and
    fall. Even if the company is going through a bad
    phase, the stock price may go up due to a rising
    stock market

64
  • While conversely, the stock price may fall
    because the market is not steady even if the
    investors company is doing well. Hence, these
    are the market risks that the stocks investors
    generally face.

65
  • The industry risk affects all the companies of a
    certain industry. Hence the stocks within an
    industry fall under the industry risk. The
    regulatory risk may affect the investors if the
    investors company comes under the obligation of
    government implemented new regulations and laws.
    The business risk may affect the investors if the
    company goes through some convulsion depending on
    management, strategies, market share and labor
    force.

66
Capital Market Conditions
  • The capital market conditions are influenced by
    the rise and fall of the stock market and bond
    market. Other than the financial condition of the
    economy, capital markets are also influenced by
    various other external factors.

67
  • The capital market deals with the buying and
    selling of securities including stocks and bonds.
    The capital market conditions largely depend on
    the prices of stocks and bonds. There are various
    risks involved in the capital market investment
    that affect the capital market conditions. The
    capital market risks, also termed as systematic
    risks, can be either market driven, industry
    driven or business driven.

68
  • The risks may affect the stock and bond prices
    gravely. The capital market investors always need
    to be aware of the various factors that affect
    the capital market conditions.

69
  • The economists suggest that behavior of the
    capital market also largely depends on the whims
    of the investors. The investors may temporarily
    pull the stock prices resulting over-reaction in
    the financial market. The excessive optimism, or
    also known as euphoria, may thus pull up the
    stock price unduly high. On the other hand,
    excessive pessimism may also drive the stock
    price to the lowest.

70
  • In order to improve the liquidity and transaction
    feasibility, the capital markets undergo
    innovations and experiments. The major
    contribution of the capital markets to the
    financial markets is to raise the capital. The
    corporations, companies, banks and governments
    issue stocks and bonds in order to raise funds.

71
  • The capital market plays the base market for
    this. The conditions of capital market influence
    the overall condition of the financial market.
    While the fluctuation of stocks and bonds prices
    affect the conditions in capital market, the vise
    versa is also true. Depending on the condition of
    the capital market, the trading trends of the
    stock markets and bond markets may also vary.

72
  • The capital markets may be either primary market
    or secondary market. On one hand when the primary
    market deals with the newly issued securities,
    the secondary market trades the securities that
    have already been issued. The overall market
    trend of issuing the securities also affects the
    capital market conditions heavily.

73
Role of Capital Market
  • The primary role of the capital market is to
    raise long-term funds for governments, banks, and
    corporations while providing a platform for the
    trading of securities. This fundraising is
    regulated by the performance of the stock and
    bond markets within the capital market. The
    member organizations of the capital market may
    issue stocks and bonds in order to raise funds.
    Investors can then invest in the capital market
    by purchasing those stocks and bonds.

74
  • The capital market, however, is not without risk.
    It is important for investors to understand
    market trends before fully investing in the
    capital market. To that end, there are various
    market indices available to investors that
    reflect the present performance of the market.

75
  • Regulation of the Capital Market
  • Every capital market in the world is monitored by
    financial regulators and their respective
    governance organization. The purpose of such
    regulation is to protect investors from fraud and
    deception. Financial regulatory bodies are also
    charged with minimizing financial losses, issuing
    licenses to financial service providers, and
    enforcing applicable laws.

76
  • The Capital Markets Influence on International
    Trade
  • Capital market investment is no longer confined
    to the boundaries of a single nation. Todays
    corporations and individuals are able, under some
    regulation, to invest in the capital market of
    any country in the world. Investment in foreign
    capital markets has caused substantial
    enhancement to the business of international
    trade.

77
  • The Primary and Secondary Markets
  • the capital market is also dependent on two
    sub-markets the
  • primary market and the secondary market. The
    primary market
  • deals with newly issued securities and is
    responsible for
  • generating new long-term capital. The secondary
    market handles
  • the trading of previously-issued securities, and
    must remain
  • highly liquid in nature because most of the
    securities are sold by investors. A capital
    market with high liquidity and high transparency
    is predicated upon a secondary market with the
    same qualities.

78
Capital Market Securities
  • Stocks and bonds are generally termed as the
    capital market securities. These are traded in
    separate markets. These capital market securities
    are used by a number of companies, corporations
    and governments to raise funds for various
    purposes. These funds are raised for long terms.
    There are the regulatory authorities in every
    country to supervise the capital market
    securities and their respective market.

79
  • The bond market is a part of the capital market
    and provides the opportunity to deal in the debt
    securities. Bond is the medium of dealing in the
    debt securities. As one of the capital market
    securities, bond enjoys a vast international
    market which is estimated around 45 trillion. A
    huge portion of this bond market transaction
    generally takes place in the over-the-counter
    market. On the other hand, the corporate bonds
    are listed on the exchanges

80
  • There are different types of bonds available in
    the market like the corporate bond, The municipal
    bond, the government bond and many more. Among
    all these capital market securities, the
    government bond is the most secured one. The
    government bond market is very big and its
    liquidity is also beyond comparison.

81
  • Another important capital market securities is
    known as stocks. These are preferred by the
    investors because an investor can get huge
    returns from this capital market instrument. The
    stock market is used for trading of company
    stocks, other securities and derivatives. 45
    trillion is the estimated size of the global
    stock market. This market is used by the
    companies to raise funds for different purposes.
    At times, the governments also turn towards the
    stock market to generate funds.

82
  • The market participants include every kind of
    investor. There are both the individual investors
    and the institutional investors who are taking
    part in the market.

83
  • In the past, there were only the individual
    investors in the market but the market trend has
    completely changed and todays market is mainly
    dominated by the institutions which in turn, is
    increasing the volume of the market.

84
  • The investor should take proper care while
    selecting the capital market securities because
    the risk factor related to these securities are
    different. At the same time, the returns may
    also vary. So a proper research should be done
    before investment.

85
Capital Market Line
  • The capital market line (CML) is a kind of graph,
    originating from the capital asset pricing model
    (CAPM). The CAPM is used to confirm a
    theoretically-suited necessary rate of return on
    an asset when it is about to be added to an
    existing and well-performing portfolio.

86
  • The CML is used to determine the rate of return
    for certain efficient portfolios. This analysis
    is dependent upon the risk-free rate of return
    and the amount of risk involved in a particular
    portfolio.

87
  • The Sharpe ratio, through certain calculations,
    represents the proportion of risk and extra
    return that a portfolio provides. The portfolio
    which has the highest Sharpe ratio is known as
    the market portfolio. Every portfolio included
    in the market portfolio is optimized for a
    certain amount of risk. The amount of risk
    related to the particular asset is considered
    with importance.

88
  • According to the CAPM, the market portfolio
    represents the efficient frontier. The efficient
    frontier can be defined as an ingathering of
    portfolios. The market portfolio, when combined
    with the risk-free asset, is capable of producing
    a higher return than the efficient frontier

89
  • The combination of the market portfolio and the
    risk-free asset gives birth to the CML.Experts
    tend to prefer CML over the efficient frontier
    because the CML considers the addition of a
    risk-free asset in the portfolio.

90
Venture Capital Market
  • Venture capital is an age old concept but the
    venture capital market has developed in the
    recent decades. The term venture capital denotes
    the act of investment in the areas of high risk,
    in order to get some high returns

91
  • The developments in the venture capital market
    has taken place in the US markets mainly. The
    market of venture capital, in the past, was
    disconnected and may be identified as an
    individualized to some extent. In the recent
    times only, the market has been shaped and the
    market became matured.

92
  • Venture capital markets are like boons for Those
    who wants to set up new business. At the same
    time, if an existing business wants to develop,
    the venture capitalists are there to provide
    financial assistance. These capitalists have
    their own business interest behind the assistance

93
  • These people wants to have a share of the huge
    profits by the business in the future. Because of
    this, only those businesses are selected which
    are supposed to develop rapidly in the future.
    For the purpose, the venture capitalists have
    their own team of people to identify the
    appropriate opportunities.

94
  • The modern concept of venture capital should be
    grateful to General Doriot because he was the
    person who founded the American Research and
    Development Fund.
  • This was done to provide financial assistance to
    the activities of developing new technologies in
    the US universities. At the same time, the
    commercial use and financial benefits from such
    technologies were also considered seriously.

95
  • With the commercial success of the concept of
    venture capital, big players entered the venture
    capital market of United States of America. The
    giant companies like Xerox and General Electric
    played a major role in expanding the venture
    capital market

96
  • The entry of these companies in this market
    encouraged with separate divisions to deal in the
    market, encouraged many others. Because of these
    situations, the venture capital market was
    expanded beyond the territories of US and within
    a short period, it gained ground globally.

97
Debt Capital Market
  • Debt capital market and equity market jointly
    makes the capital market. These markets are used
    by the governments and several companies for
    raising funds for long and short term. The trade
    in these markets are done through several
    financial instruments.

98
  • The debt capital market trades in such financial
    instruments which pays interest. There are the
    bonds and several loans which acts as the prime
    financial instrument of this market.
  • Because of these interest factor, the debt
    capital market is also known as fixed income
    market.

99
  • Bonds are of several types like the government
    bonds, the municipal bonds, corporate bonds and
    many more. By investing in these bonds, the
    investors actually provide loan to the respective
    organization or to the government. These loans
    are provided for some fixed interest rate which
    the company or the organization provides to the
    investor at regular intervals.

100
  • The modern concept of venture capital should be
    grateful to General Doriot because he was the
    person who founded the American Research and
    Development Fund. This was done to provide
    financial assistance to the activities of
    developing new technologies in the US
    universities.

101
  • The giant companies like Xerox and General
    Electric played a major role in expanding the
    venture capital market. The entry of these
    companies in this market encouraged with separate
    divisions to deal in the market, encouraged many
    others. Because of these situations, the venture
    capital market was expanded beyond the
    territories of US and within a short period, it
    gained ground globally.

102
Equity Capital Market
  • The equity capital market is an important part of
    the capital market. In this market, companies and
    financial institutions raise funds and provide
    equities using the shares of their own
    businesses. Investors invest in the company by
    purchasing the shares or equities

103
  • Company stocks are the prime financial instrument
    of the equity capital market. This instrument is
    provided and maintained by the companies or the
    financial institutions themselves. The
    reputation of the stocks in the equity capital
    market is largely dependent on the companies
    themselves, because the it is maintained by
    different types of financial data provided by the
    companies.

104
  • The provided data helps the investor understand
    the present position and the future of the
    company in the equity capital market.When the
    investor is satisfied, he or she makes the
    investment and the money grows with the company.
    In certain situations, the result may not be
    beneficial to the investor. The companies also
    provide regular dividends to these investors.

105
  • Participants in the equity capital market range
    from huge companies to small individual
    investors. In the past, wealthy individuals
    dominated the market, but market trends are
    different now. The introduction of institutional
    investors has improved the market, and today they
    are playing the dominant role.

106
  • In addition to different types of company stocks,
    the equity capital market provides financial
    instruments known as derivatives. Futures, swaps
    and options are among these derivatives. The
    value of these instruments derives from the
    equities themselves.

107
  • The equity capital market and the debt capital
    market together form the capital market. The
    primary difference between the equity capital and
    debt capital markets is the amount of risk and
    return related to them. The equity capital market
    is known for its huge returns and its high risks.
    On the other hand, the debt capital market is far
    more secure than the equity market but the
    returns are low.

108
Major Capital Market Companies
  • Major capital market companies of the world are
    doing a flourishing business. Many investment
    banking and brokerage companies provide capital
    market services to their clients. Wanchova
    Securities provides top class capital market
    services

109
  • This company provides corporate advisory
    services, private capital, advice on
    acquisitions, risk management services, equity
    investing, asset and mortgage backed securities,
    and underwriting services. Genuity Capital
    Markets is a private firm providing capital
    market services independently in Canada. The
    investment banking services of this company
    includes facilitating acquisitions and mergers,
    providing financial restructuring services and
    dishing out corporate finance

110
  • Private Capital Market Corporation facilitates
    services like venture capital financing, growth
    financing, recapitalizations, business sales,
    private placements, and management buyouts.
    This investment bank is registered with the
    Ontario Securities Commission. The firm works in
    close collaboration with their clients in order
    to satisfy their financial needs.

111
  • Viteos Capital Market Services processes
    securities and provides various fund services.
    Intermediaries in the capital market like asset
    managers, investment banks, brokers, and
    financial information service providers benefit
    from the services of this company.

112
  • NCB Capital Markets specializes in wealth and
    asset management services. This Jamaican company
    provides products and services like mutual funds,
    bonds, stocks, and wealth access. Investors in
    the stock market having long term and medium term
    goals can benefit from the services of this
    company.

113
  • Another of the major capital market companies is
    Louis Capital Markets. This brokerage firm has an
    enviable global footing. This company was
    established in New York in 1999. Cash equity,
    research, and execution of commodities and
    foreign exchange business are the chief concerns
    of this company

114
  • Samco Capital Market is an investment bank
    established in 1987. This company has expertise
    in corporate finance, bank development, municipal
    finance, and securities securities. The company
    also trades in fixed income securities. The
    consultation services on mortgage buying provided
    by the company are of the first order. ORIX
    Capital Markets is owned by ORIX USA Corporation.
    They have products like asset backed securities,
    synthetic credit products, structured real estate
    and financing transactions, and high yield
    municipal securities. Some other important
    capital market companies are Loop Capital
    Markets, SBI Capital Markets, and PNC Capital
    Markets.

115
Global Capital Market
  • The global capital market is gaining depth
    everyday. Along with the development of this
    market, the liquidity is also growing at a rapid
    pace. Several surveys have shown that financial
    stocks are growing worldwide and their growth
    rate is much higher than that of global gross
    domestic products.

116
  • Capital market represents the securities market
    where stocks, bonds, and several other
    derivatives are traded, and both long and
    short-term debts are raised here. This market
    provides companies, as well as governments with
    necessary funding, and, simultaneously, grants
    investors with the opportunity to make regular
    income.

117
  • The development of the global capital market can
    also be traced by the fact that the financial
    holdings of the world is growing quickly- it is
    estimated to be somewhere around 140 trillion,
    and this amount is expected to cross the 200
    mark before the end of 2010.

118
  • With the emergence of the concept of
    globalization, the diversified world market has
    been transformed into a single market, which has
    resulted in the promotion of inter-country trade.
    Because of this, there has been an increase in
    stature and an increase in capital flow, of which
    the United States of America, Europe and Britain
    share almost 90.

119
  • In these circumstances, the US is playing a vital
    role in the development of the global capital
    market and, alone, is the destination of 85 of
    the net capital flow of the entire globe. Britain
    also plays a significant role in the market. On
    the other hand, because of the rapid
    transformation of the Eurozone, its emergence as
    a financial power is causing positive changes.
    This could shift the pillars of the world
    economy, as the Eurozone is expected to soon
    stand on the same financial platform with its
    counterparts.

120
Primary Capital Market
  • The capital market is divided in two different
    markets. These are the primary capital market and
    secondary capital market. The primary capital
    market is concerned with the new securities which
    are traded in this market. This market is used by
    the companies, corporations and the national
    governments to generate funds for different
    purpose.

121
  • The primary capital markets is also called the
    New Issue Market or NIM. The securities which are
    introduced in the market are sold for first time
    to the general public in this market. This market
    is also known as the long term debt market as the
    money raised from this market provides long term
    capital.

122
  • The process of offering new issues of existing
    stocks to the purchasers is known as
    underwriting. At the same time if new stocks are
    introduced in the market, it is called the
    Initial Public Offering. The act of selling new
    issues in the primary capital market follows a
    particular process. This process requires the
    involvement of a syndicate of the securities
    dealers. The dealers who are running the process
    get a certain amount for as commission. The price
    of the security offered in the primary capital
    market includes the dealer,s commission also.

123
  • Again, if the issue is a primary issue, the
    investors get the issue directly from the company
    and no intermediary is needed in the process. For
    the purpose, the investor needs to send the exact
    amount of money to the respective company and
    after receiving the money, the particular company
    provides the security certificates to the
    investors.

124
  • The primary issues which are offered in the
    primary capital market provide the essential
    funds to the companies. These primary issues are
    used by the companies for the purpose of setting
    new businesses or to expanding the existing
    business. At the same time, the funds collected
    through the primary capital market, are also used
    for the modernization of the business.

125
  • At the same time, the primary capital market is
    also involved in the process of creating capital
    for the respective economy. There are three
    ways of offering new issues in the primary
    capital market. These are Initial Public
    Offering
  • Preferential Issue.
  • Rights Issue (For existing Companies)
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