38 Questions
What is the primary market for?
Trading of new long-term capital
What happens to a newly issued stock after an initial offering?
It is listed on a stock exchange
What is the main difference between the primary and secondary markets?
The involvement of the company
What is the primary function of a stock exchange?
To provide facilities for stock brokers and traders
What is traded in the secondary market?
Already issued securities
What is the main purpose of the primary market?
To provide additional funds to the issuing companies
What is not a function of the secondary market?
Providing additional funds to the issuing companies
What is the main difference in the type of securities traded in the primary and secondary markets?
New securities vs already issued securities
What is the main function of financial markets?
To facilitate the trade in financial products
What type of financial market provides financing through the issuance of shares?
Stock market
What is the primary function of the primary market?
To deal with the issuance of new securities
What is the capital market?
A market for securities
What is the main role of financial regulators in the capital market?
To protect investors against fraud
What is an initial public offering (IPO)?
A sale of a new stock issue
What is the secondary market?
A market for the trading of existing securities
What is the main difference between the primary market and the secondary market?
The primary market deals with new securities while the secondary market deals with existing securities
What is the type of issue of shares or convertible securities made by an issuer to its existing shareholders?
Right Issue (RI)
What is the role of Merchant Bankers/Lead Managers in an issue?
To provide corporate advisory services and manage the issue
Who is responsible for holding stocks, bonds, and other assets to safeguard them from being stolen or lost?
Custodians
What is the purpose of underwriters pursuing large institutional investors?
To set the price of the company's stock
What is the role of underwriters in an IPO?
To ensure regulatory requirements are complied with
What is the ratio in which rights are offered to existing shareholders?
A particular ratio to the number of shares held
Who are the specialists in the staff of underwriters?
IPO underwriters
What is the purpose of pre and post issue due diligence?
To ensure regulatory requirements are complied with
What is the impact of the level of activity in the primary market on the secondary market?
It has a direct impact
Why are investors important for a capital market?
They are the lifeline of the market
What is the primary function of a depository?
To hold securities in electronic form
What is the synonym for secondary markets?
Stock Exchange
What happens when more and more companies issue their securities in the capital market?
Investment options for investors increase
What type of investors include mutual funds, companies, and Foreign Portfolio Investors?
Institutional Investors
What is the general maturity period of a bond?
More than one year
What is the purpose of a Depositary Receipt (GDR)?
To provide international investors with local settlement
What is the benefit of warrants attached to GDRs?
They give investors an option to get it converted into equity at a later date
What is a derivative?
A financial instrument that derives its value from some other financial price
What is a future?
An agreement to buy or sell an underlying security at a future date
What is an option?
A right but not an obligation to buy or sell an underlying asset
What is a call option?
The right but not the obligation to purchase an underlying asset
What is a put option?
The right but not the obligation to sell an underlying asset
Study Notes
Financial Markets
- Financial markets are organizations that facilitate the trade in financial products, such as stock exchanges, which facilitate the trade in stocks and bonds.
- The financial markets can be divided into different categories, including:
- Capital Market
- Money Market
- Derivatives Market
- Foreign Exchange Market
- Commodity Market
Capital Market
- The capital market is the market for securities, where companies and governments can raise long-term funds.
- The capital market includes the stock market and the bond market.
- Financial regulators oversee the capital markets to ensure that investors are protected against fraud.
- The capital markets consist of primary markets and secondary markets.
Primary Market
- The primary market deals with the issuance of new securities.
- Companies, governments, or public sector institutions can obtain funding through the sale of a new stock or bond issue.
- In the case of a new stock issue, this sale is an initial public offering (IPO).
- Features of the primary market include:
- Market for new long-term capital
- Securities are sold for the first time
- Issued by the company directly to investors
Secondary Market
- The secondary market is the market for trading of securities that have already been issued in an initial offering.
- Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange.
- A stock exchange is an organization that provides facilities for stock brokers and traders to trade company stocks and other securities.
Primary Market vs. Secondary Market
- The primary market refers to the market in which new securities are issued by the company to the public for the first time, while the secondary market refers to the market where new securities which are already issued are traded.
- The primary market deals with new securities, whereas the secondary market deals with already issued securities.
- The primary market provides additional funds to the issuing companies, whereas the secondary market does not provide additional funds.
Participants in the Capital Market
- Investors: Retail investors, institutional investors, and foreign portfolio investors.
- Stock Exchange: A place where securities issued by issuer companies are listed and traded.
- Depository: An organization that holds securities of investors in electronic form and provides other functions like pledge, safekeeping of securities.
Derivatives
- A derivative is a financial instrument that derives its value from some other financial price.
- The most important derivatives are futures and options.
- Futures: A contract to buy or sell the underlying security at a specified price on a future date.
- Options: Give the buyer the right to buy or sell the underlying asset at a predetermined price, within or at the end of a specified period.
Capital Market Intermediaries
- Merchant Bankers/Lead Managers: Manage the issue, provide corporate advisory services, and handle pre-issue and post-issue due diligence.
- Underwriters: Ensure that all regulatory requirements are complied with, and pursue large institutional investors to invest in the company.
- Custodians: A financial institution responsible for holding stocks, bonds, and other assets to safeguard them from being stolen or lost.
Introduction to financial markets and their types, including capital, primary, and secondary markets, as well as different types of securities and facilitating organizations.
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