Capital Markets
Essay Preview: Capital Markets
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Day 1 – Capital Markets
Financial Markets
Financial Markets Overview
Global Financial Markets
Need for Financial Markets
Role of Financial Market
Players in Financial Markets
Types of Financial Markets
Segmentation of Financial Markets
Pillars of Financial Markets
What is Capital Market?
Capital Markets serve to channel savings and surplus financial resources in the economy, i.e. funds from the suppliers of capital to users or demanders of capital.
The capital market can be defined as a meeting place where those who require capital seek out others who have surplus capital. Originally, meeting places were physical spaces but now participants are located at different geographical locations and the deals are conducted via electronic devices.
Global Capital Markets
Capital Market Participants
Stock Exchange vs. OTC
Risks in Capital Markets
Asset Classes
Equity – Types of Stock
Common Stock
The ownership of common stock entitles shareholders to a number of rights not available to other individuals
Only the owners of common stock are permitted to vote on certain key matters concerning the firm such as election of the board of directors, adoption of byelaws, amendment to corporate charter, new equity issue etc.
They have right to a residual claim of income and assets after all prior claims (by bondholders, creditors etc.) have been paid.
They have limited liability (a common shareholders risk is limited to the value of his or her investment)
The total return on common stock investments comes from dividend income (yield) and capital gains (appreciation in the price of the shares)
Preferred Stock
Preferred stock represents an equity interest in a firm that usually does not allow for significant voting rights
Preferred shareholders technically share the ownership of the firm with common shareholders and are therefore compensated only when earnings have been generated
A cumulative provision on most preferred stock prevents dividends from being paid on common stock until all preferred stock dividends (both current and those previously omitted) have been paid
Normally the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend
Dividend paid is not a tax deductible expense for the firm making preferred stock more expensive than bonds
Different Stock Exchanges across Globe
New York Stock Exchange
The New York Stock Exchange (NYSE), popularly known as the Big Board, celebrated its bicentennial in 1992.
The NYSE Group is a for-profit, publicly-owned company; its share-code is NYX
About 2800 U.S. companies and 450 non-US companies are listed
More than $22 trillion market value
The NYSE has 1,366 exchange members. The exchange members:
Are said to own “seats” on the exchange.
Collectively own the exchange, although it is managed by a professional staff.
The seats are regularly bought and sold.
1366 seats (fixed)
Seat price range $2 million to $ 4 million depending on demand / supply
Seat price changes in response to many factors; market conditions, technology and competition are three of the many factors
NYSE Trading Floors
Seven specialist firms; down from 10 in the recent past and a steep decline from 81 in 1975; result of consolidation among specialist firms
470 specialists; specialists work for specialist firms
Each specialist has 5 to 10 stocks
Specialists process trades from floor brokers (5%) and electronically (95%)
Since 1997, the NYSE Allocations Committee has allowed listing companies to choose which specialist will handle the companys stock
NASDAQ
NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations system) was established in 1971 as a subsidiary of the NASD (National Association of Securities Dealers)
It is the second largest stock market in the U.S. in terms of total dollar volume of trading.
NASDAQ is a U.S. electronic stock market; it was started to improve the transparency of the over-the-counter market for unlisted stocks
By 1995 it had surpassed the NYSE in reported trading volume
NASDAQ is now a private for-profit corporation owned by its shareholders and traded at its own exchange after NASD reduced its ownership to about 30%; share-code is NDAQ
NASDAQ