capital market
Capital market means the market for medium and long term funds. It is an organized market consisting of suppliers, users of fund and institutions which assist them. Suppliers includes investing public, banks, financial institutions, mutual funds etc.. Users are business firm, government and semi government agencies. Those who are assisting the suppliers and users of funds are underwriters share brokers and stock exchanges and merchant bankers etc..
Capital market acts as a medium through which the savings of the public are available to business and government.
This market is divided into two sections viz.1) The gilt- edged market
2) The Industrial securities market.
The gilt- edged market- is a market for government and semi government securities. Also called government securities market.
The industrial securities market is divided as !) primary market !!) secondary market
Primary market (New issue market- NIM)- It is a market for raising fresh capital in the form of shares and debentures by companies. The prime function of the new issue market is to facilitate the transfer of funds from the willing investors to the entrepreneurs setting up new corporate enterprises or going for expansion, diversification, growth or modernization.
Factors influencing
1. The state of the economy (boom, depression, recession, recovery)
2. Confidence and psychology of investors
3. Overall corporate performance
4. Policies of the government
5. The political economical environment (external environment)
Features.
1. Fresh issue
2. Covers public sector, private sector and government sector.
3. No physical existence
4. Direct Link between company and investing public
5. Work in conjunction with stock exchange
Functions or role of NIM
1. Origination- It is the primary investigation and collection of factors that will affect the issue of shares and debentures.
a. The type of issue (equity, preference shares or debentures)
b. The timing of issue ( in prosperity equity shares and depression debentures are preferred by the market)
c. Pricing of issue ( at par, premium or discount) are fixed with the help of the investigation
2. Propagation- the prospective investors should be informed or educated about the prospects of investment opportunity by highlighting the features of the issue.
3. Underwriting- is a kind of guarantee undertaken by an institution ensuring the marketability of an issue. a large number of institutions such as LIC, UTI, IDBI, IFCI, ICICI, GIC etc.. involving in underwriting.
a. Stand by under writing- agreement to take over all such securities as are not absorbed by the market.
b. Outright purchase- buy the whole issue and make payment thereof . There after they arranged to sell them to investors.
c. Joint underwriting- If a large amount of issue many underwriters join together to underwrite the issue
d. Syndicate underwriting- underwriters enter into an agreement among themselves to underwrite an issue particularly one which is risky and involve quite large amount of issue.
4. Distribution- final sale of securities to the ultimate investors.
Method of raising capital in NIM
The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:
- Best efforts contract
- Firm commitment contract
- All-or-none contract
- Bought deal
- Dutch auction
- Self distribution of stock
Usually, the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of existing shares.
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option.
| Auction |
A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce the inefficient process. He devised a way to issue shares through a Dutch auction as an attempt to minimize the extreme underpricing that underwriters were nurturing. Google is one established company that went public through the use of auction. Google's share price rose 17% in its first day of trading despite the auction method. Brokers close to the IPO report that the underwriters actively discouraged institutional investors from buying to reduce demand and send the initial price down. The resulting low share price was then used to "illustrate" that auctions generally don't work. Perception of IPOs can be controversial. For those who view a successful IPO to be one that raises as much money as possible, the IPO was a total failure. For those who view a successful IPO from the kind of investors that eventually gained from the underpricing, the IPO was a complete success. It's important to note that different sets of investors bid in auctions versus the open market—more institutions bid, fewer private individuals bid. Google may be a special case, however, as many individual investors bought the stock based on long-term valuation shortly after it launched its IPO, driving it beyond institutional valuation.
Issue price
A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at which the shares should be issued. There are two ways in which the price of an IPO can be determined: either the company, with the help of its lead managers, fixes a price or the price is arrived at through the process of book building.
Quiet period
The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO are restricted from issuing any earnings forecasts or research reports for the company.
Stag profit
Stag profit is a stock market term used to describe a situation before and immediately after a company's Initial public offering (or any new issue of shares). A stag is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag profit is the financial gain accumulated by the party or individual resulting from the value of the shares rising.
For example, one might expect a certain I.T. company to do particularly well and purchase a large volume of their stock or shares before flotation on the stock market. Once the price of the shares has risen to a satisfactory level the person will choose to sell their shares and make a stag profit.
Largest IPOs
- Coal India Limited $53.1B in 2010
- General Motors $23.1B in 2010
- Agricultural Bank of China $22.1B in 2010
- Industrial and Commercial Bank of China $21.9B in 2006
- American International Assurance $20.5B in 2010
- Visa Inc. $17.9B in 2008
- AT&T Wireless $10.6B in 2000
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