Capital market which is also known as the securities market is a trading market that garners capital from the investors and makes them available to companies and the government for development of projects. The capital market includes the bond market and the stock market among others. The capital market consists of development bank, commercial banks and stock exchanges.
There are two types of instruments that are traded in the capital market. They are as follows:
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The capital market plays a major role in the growth of the economy. It allows transfer of funds from people who have surplus money or seek higher returns for an investment in companies. The primary role of the capital market is as follows:
The capital market can be divided into two parts:
An equity instrument offers ownership rights in a firm, like a share certificate. Equity instruments are generally issued to company shareholders and are used to fund the business. Some of the most common forms of equity instruments include common stock and preferred stock.
These are the stocks that allow the investors gain a sizable amount of profit through raising prices of shares and dividend payments. It is equity ownership that allows the holders of this stock to enjoy voting rights on corporate matters. However, in case the company suffers heavy losses and ends up bankrupt, the holders of the common stock are the last ones to get their money back after creditors, bondholders, and holders of preferred stock.
Preferred stock also represents owning a share of the company. Preferred stock pays a predetermined dividend, whereas the dividends paid to common shareholders tend to vary according to the company's fortunes.
Dividends on preferred stock are often larger than common stock. Holders of preferred stock do not get to vote on company matters. If a company's assets are liquidated, the preferred stockholders get to redeem their shares before the holders of the common stock, giving them a better chance at getting at least part of their money back
Cumulative preferred stocks:
When unpaid dividends on preference shares are treated as arrears and are carried forward to subsequent years, then such preference shares are known as cumulative preference shares. It means unpaid dividend on such shares is accumulated till it is paid off in full.
Non-cumulative preferred stocks:
Non-cumulative preference shares are those types of preference shares, which have the right to get fixed rate of dividend out of the profits of the current year only. They do not carry the right to receive arrears of dividends. If a company fails to pay dividend in a particular year, then it need not to be paid out of future profits.
Participating preferred stocks:
Participating preferred stock is preferred stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of liquidation. This form of financing is used by private equity investors and venture capital firms.
Convertible preferred stocks:
Convertible preferred stocks refer to a kind of preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date.
Debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay the lender according to the terms of a contract. The debt instrument provides fixed and higher returns than bank fixed deposits. Examples of debt instruments are bonds, debentures, leases, certificate, bills of exchange and promissory notes.
A hybrid instrument is a type of financial security that combines two or more different financial instruments. Hybrid securities are a group of securities that combine the characteristics of securities, debt and equity. Hybrid instruments are designed as debt-type instruments with exposure to equities market. Examples of hybrid instruments include convertible bonds, preferred stocks, equity default swaps and structured notes linked to an equity index.
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