1. Financial Market Dr S.M.Tariq Zafar M.Com, PGDMM, PhD (Social Sector Investment) syed.zafar@omancollege.edu.omsyed.zafar@omancollege.edu.om, smtariqz2015@gmail.com

2. Financial Market Chapter - II Capital Markets

3. What is Capital Market Characteristics of Capital Market Suppliers of Funds Demanders of Funds Function of the Secondary Markets Trading Location Market Structures Perfect Market Role of Brokers and Dealers in Real Market Market Efficiency: Treasury Securities: Types of Treasury Securities:

4. What is Capital Market A capital market is one in which individuals and institutions trade financial securities. Organizations and institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets. Any government or corporation requires capital (funds) to finance its operations and to engage in its own long-term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the company's name. These are bought and sold in the capital markets.

5. Capital Markets  Markets in which longer-term securities are issued and traded  Equity markets  Corporate debt markets  Government debt markets  Foreign exchange markets  Derivatives markets  Term to maturity of more than one year

6. A. Characteristics of Capital Market: The capital market is designed to finance long-term investments by businesses, governments, and households. Funds raised in the capital market makes possible the construction of factories, highways, schools, residential buildings, and the like. Such financial instruments have original maturities of more than one year and range in size from small loans to very large, multimillion credits.

7. B. Suppliers of Funds The suppliers of funds in the capital market are more varied than in the money market. The bulk of long-term funds in the capital market, however, are provided by financial institutions such as banks, insurance companies, and pension funds.

8. C. Demanders of Funds Among the demanders of funds in the capital market, individuals are mentionable, who need such funds in order to finance purchase and/or construction of a new home. Moreover, governments rely on such funds to build schools, highways, and other infrastructures as well as provide essential services to the public. Government treasury issue long-term notes and bonds to pay for federal government programs The most important borrowers are businesses of all sizes that issue long-term IOUs to cover purchase of equipment & construction of new plants and facilities.

9. Function of the Secondary Markets: In the secondary market the issuer of securities may obtain regular information about the value of the asset. The firm can discover what value investors attach to their stocks. Such information is helps users assess how well they are using the funds acquired from earlier primary market activities. Investors in financial assets on the other hand receive several benefits from a secondary market such as market offer them liquidity for their assets as well as information about the asset fair values. Furthermore bring together many interested parties and thereby reduce the searching cost.

10. Trading Location Secondary markets are exists throughout the world. In the united states and in many countries of the world trading of shares take place in stock exchanges. Additional significant trading in stocks take place in over the counter market, which is the geographically dispersed group of traders link to one another via telecommunication system. The dominant OTC market for stocks in unites states is Nasdaq.

11. Market Structures Market structures divided into two parts: (1)Continuous Market (2)Call Market, (1)Continues Market: Prices are determine continuously throughout the trading day as the buyer and sellers submit orders. Prices may vary with the pattern of order flow reaching the market and not because any change in demand and supply. (2) Call Market: Contrasting to continuous market the orders are batched or grouped together for simultaneously execution

12. Perfect Market Perfect market results when the buyers and sellers is sufficiently large and all participants have enough knowledge so no individual can influence the commodity price. A perfect market is also free of transaction cost and any obstacles in demand and supply for commodity. The economist refer these various costs and obstacles as frictions. The friction generally result in buyers pay more than in the absence of frictions or sellers receiving less.

13. In case of financial markets, friction would include:  Commission charged by brokers  Bid ask spreads charged by dealers  Order handling and clearance charges  Taxes (on capital gains) and government imposed transfer fees  Cost of acquiring information about the financial asset  Trading restriction  Restriction on market makers  Halts to trading that may imposed by regulators where the financial asset is traded.

14. Role of Brokers and Dealers in Real Market Brokers: Investors need someone to receive and keep track of their orders for buying or selling, to find the other parties wishing to sell or buy, to negotiated for good prices, to serves as focal point for trading and to executive the orders. These all functions are performed by broker. A broker is an entity that acts on behalf of an investor. In legal terms the broker is agent of the investor. Brokerage activity does not require the broker to buy and sell or hold financial asset rather, the broker receives, transmitted and executive orders with other investor. The broker receive the explicit commission for these services.

15. Dealers: The real market differ from the perfect market because of the possibility frequent event of a temporary imbalance in the number of buy and sell orders that investor may place for any security at any one time. The need for the dealer or market maker is due to imbalance in market. The Dealer is ready and willing to buy financial asset (to add inventory of financial asset) for its own account or sell from its own account (to reduce of financial assets).

16. Market Efficiency: Market efficiency divided into two parts (1)Operational Efficiency (2)Pricing Efficiency (1) Operational Efficiency: In operational efficient market, investor can obtain transaction services as cheaply as possible. At one time brokerage commission in the united states were fixed and the brokerage industry charged high fees. (2) Pricing efficiency Pricing efficiency refers to a market where prices at all time fully reflect all available information that is relevant to the valuation of the securities. That is, investors quickly adjust the demand and supply schedules for a security when new information about it becomes available.

17. Treasury Securities: The large volume of total debt and large size of any single issue have contributed to making the treasury market most active and hence most liquidate market in world. The spread between bid and ask is considerably narrower than in other sectors of bond market. The investor receives only a receipt as evidence of ownership instead of certificate.

18. Types of Treasury Securities: (A) Discount (B) Coupon 1.Discount Securities: These securities pay only a contractual fixed amount at maturity called maturity value. Discounted instruments are issued below maturity value and return to investor the difference between maturity value and issue price. 1.Coupon Securities: Coupon securities pay interest every six months plus principal at maturity. (i) Treasury bills: All securities with maturities of one year and less as discount securities. (ii) Treasury Notes: All securities with maturity of between two and ten years (iii) Treasury Bonds: All securities with maturity more than the ten years are called Treasury bonds.

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