1-5 PM - Intro to Capital Markets

8/4/2019 1-5 PM - Intro to Capital Markets

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Indus Valley Partners Confidential0

IVP Domain sessions :

Introduction to Capital MarketsJune 09, 2011


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Agenda

Finance Overview

Market Overview

Introduction to Financial Market

Introduction to Financial System

Classification of Financial Markets

Market Participants

Finance Overview

Market Overview

Introduction toFinancial Market

Introduction toFinancial System

Classification ofFinancial Markets

MarketParticipants


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Agenda

What is Finance?

Finance Overview

Market Overview




MarketParticipants


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What is Finance?

Finance is the study of how and under what terms savings (money) are

allocated between lenders and borrowers.

Finance is distinct from economics in that it addresses not only how

resources are allocated but also under what terms and through

what channels

The study of finance requires a basic understanding of:

Securities

Corporate law

Financial institutions and markets

Finance Overview

Market Overview




MarketParticipants


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Agenda

What is a Market ?

FinanceOverview

Market Overview




MarketParticipants


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What is a Market?

Market any place orprocess that bringstogether buyers andsellers with a view toagreeing a price

The basis of how aneconomy operatesthrough production and

subsequent exchange

FinanceOverview

Market Overview




MarketParticipants


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What is a Market?

Demand the amountconsumers desire topurchase at variousalternative prices

Demand reflects thedegree of valueconsumers place on items price and satisfaction

gained from purchase(utility)

Supply the amountproducers are willing tooffer for sale at variousprices

Supply reflects the costof the resources usedin production and thereturns/profits required

FinanceOverview Market OverviewIntroduction to

Financial MarketIntroduction to

Financial SystemClassification of

Financial MarketsMarket

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Agenda

INTRODUCTION TO FINANCIAL MARKETS





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Financial Market

A financial market is a place where buyers and sellers of financial

instruments/assets come together and financial transaction takes place.

Financial instruments/assets includes cash, cheque, stocks, bonds,derivatives etc.

Financial system: Transfers funds from economic entities that are surplusin funds to economic entities that are deficient in funds





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Role of Financial Market

Price Discovery Process

Determination of the price of trade asset

Interaction of buyers and sellers in a financial market

Liquidity

Mechanism to sell financial assets for the seller

Ease of availability of assets for the buyer

Reduction of search & information costs

Search Cost

Explicit Cost e.g.. Advertisement Cost

Implicit Cost e.g. Opportunity Cost

Information Cost

Cost associated with assessing the amount and likelihood of generation ofexpected cash flow





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Classification of Financial Market

Financialmarket

Type ofIssuance

Maturity ofClaim

Type ofClaim





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Classification of Financial Market (contd.)

Type ofIssuance

Primary market

Secondary market

Maturity of

Claim

Money Market

Capital Market

Type ofClaim

Debt Market

Equity Market

FX markets

Commodities





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Agenda

INTRODUCTION TO FINANCIAL SYSTEM





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Financial System





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Financial System


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Financial System





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Financial System (contd.)

The household is the primary provider of funds to businesses and government.

Households must accumulate financial resources throughout their

working life times to have enough savings (pension) to live on in theirretirement years

Financial intermediaries transform the nature of the securities they issue andinvest in

Banks, trust companies, credit unions, insurance firms, mutual funds

Market intermediaries simply help make markets work

Investment dealers

Brokers





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Agenda

Lets get back to Financial Markets Now!!!





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Classification of Financial Markets

Maturity of Claim

Money Markets Capital markets





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Cl ifi ti f Fi i l M k t M t it


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Classification of Financial Markets Maturityof Claim

Money markets

Money Market consists of debt securities issued with an original maturity ofless than a year

The instruments are usually highly marketable

Examples are T-bills, Call Money market, CDs,CPs, Repos, Eurodollars, LIBORMarket

Capital markets Capital Markets are markets where securities with original maturity of more

than one year are issued and traded

Examples are equity shares, government bonds, debentures, etc





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Classification of Financial Markets (contd.)

Type of Claim

Debt markets Equity Markets

FX markets

Commodities





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Classification of Financial Markets T pe of


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Classification of Financial Markets Type ofClaim

Debt Markets

Short term and long term bonds Short term debt

Treasury Bills

Commercial Paper

Long term debt Government Securities

Bonds

Claim is a fixed dollar amount





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Classification of Financial Markets Type of


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Equities market

Financial instrument representing ownership in a company

Also known as stock

Features

Residual Claim

Limited liability

Voting Rights





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FX markets

Market with largest daily turnover

Over-the-counter (OTC) market

Largely an inter-bank market

Money denominated in one currency is bought and sold

with money denominated in another currency

Spot market

Immediate transaction

Forward market

Transactions take place at a specified future date





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Commodities market

Huge market worldwide

Major exchanges are

LME (Metals)

CME (agri-commodities)

Three major categories Agricultural products fibers, grains, livestock

Energy crude oil, natural gas

Metals copper, gold, silver

Good investment during period of economic growth





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Classification of Financial Markets (contd.)

Type of Issuance

Primary Markets Secondary markets





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Classification of Financial Markets Type ofIssuance

Primary Market

The market in which new securities are issued to investorsfor the first time

Direct selling to public

New securities are created

Secondary market

The market where buyers and sellers trade in securities

already issued Securities are transferred






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Raising Capital

Early StagesVenture Capital Initial Public OfferingPrimary

Secondary

After the IPO

Rights IssueSeason Offers

Private Placement






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An initial public offering (IPO) is the first sale of shares to the public.

This sale is usually managed by an underwriting firm or a group of underwritingfirms. These are firms that buy an issue of securities from a company and resell

it to the public.

For large issues, a group of underwriters called a syndicate is formed with the

principal underwriter being called the lead manager.

The Initial Public Offering






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An IPO is called a primary offering when new shares are sold.

An IPO is called a secondary offering when the companys founders and theventure capitalist cash in some of their grains by selling shares.

IPOs commonly consist of both primary and secondary offerings.

The Initial Public Offering






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Since the firm is going public, there is no established price.

Valuation/Due Diligence

Banker and company project the companys future earnings and free cash

flows

The banker would examine market data on similar companies.

Price set to place the firms P/E and M/B ratios in line with publicly traded firms

in the same industry having similar risk and growth prospects.

On the basis of all relevant factors, the investment banker would determine a

ballpark price, and specify a range

The Initial Public Offering - Pricing






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Book Building

The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. Investors place their order into the 'electronic book managed by the book runner. This

process is called 'bidding' and is similar to open auction.

Bids cannot be entered less than the floor price of the range decided.

On the close of the book building period the 'book runner evaluates the bids on the basis ofthe evaluation criteria which may include -

Price Aggression

Investor quality Earliness of bids, etc.

The book runner and the company conclude the final price at which it is willing to issue thestock and allocation of securities.

Allocation of securities is made to the successful bidders.

Book Building is a good concept and represents a capital market which is in the process ofmaturing.

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The Initial Public Offering - Process

Appoint Listing Agent/Lead manager

Legal Marketing

T 3-6 months

Prepare prospectus

Due Diligence,Required Financial

StatementsPosting, Valuation,

Deal Structure

T 30-90 days

T 14 days

Apply for Listing &Regulatory Approval

(through listing agents)

ExchangeListing

admission

Regulators,prospectus

Pre-marketing to

institutions

Road Show and Marketing to investors

Trading

Book Building

Price Fixing,Allocation

List on Exchange,Start Trading






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After the IPO

Seasoned Offering: Sale of securities by a firm that is already publicly traded.

Rights Issue: an issue of securities which is offered only to existing shareholders.

Private Placement: Sale of securities to a limited number of investors without apublic offering.






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S d M k


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The Secondary Market Purchases and sales of existing stocks and bonds occur in the secondary market.

Transactions in the secondary market do not provide additional funds to the firm.

The secondary market increases the liquidity of securities outstanding and lowers

the required returns of investors.

Composed of organized exchanges like the New York Stock Exchange and American

Stock Exchange plus the over-the-counter (OTC) market.

Secondary Market






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Li d d OTC I


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The Secondary Market Listed Instruments

EquityBonds

Options

Futures

OTC Instruments

Forwards

Swaps

Exotic Derivatives

Listed and OTC Instruments






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T d Lif C l


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Trade Life Cycle






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Agenda

MARKET PARTICIPANTS





Participants

Securities Market


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Securities Market

Market Participants:

Banks & Brokerage Firms

Mutual Funds & Hedge Funds

Investment Managers

Corporate

Individuals

Participants can also be classified in terms of service providers and serviceusers.

Banks and Brokerage firms

Sell side (as they provide services of deal execution, clearing and settlement

services, custody etc.)

Funds/Investment Managers/Corporates /Individuals

Buy side ( as they are the buyers of the above services)






Participants

P ti i t S ll Sid


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Participants- Sell Side

Functions of Brokerage firms

Assist customers in buying and selling securities

Provide a custody service (safekeeping) for the assets

Provide periodic statements of assets


Brokers Transact on customers account and dont run

positions of their own

Get the revenue from the commissions they charge

Dealers Invest their own capital and act as principal to

the trade

Get their revenue on the basis of the spread

between the buying and selling price

Institutional InvestorExecution

Brokers

ExecutionBrokers

Execution

Brokers

Prime Broker(s)





Participants

Participants Buy side


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Participants Buy side

Investment managers support accounts of institutions like pension funds, mutual funds or

highly wealthy individuals (read Hedge Funds). Theyare also called asset managers

The fees charged by the manager is based on Portfolio size

Fixed fees per portfolio

Performance based fees

Participant profile

Investors Long term view on the market, about 3 5 years.

Speculators

Short term view on the market, could be even intra day.

Arbitrageurs

Riskless profits they look for opportunities, any mis-pricing etc. that may take place in the

market.






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Market Makers


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Market Makers

...a member of an exchange who is mandated by the exchange to maintain a

market in the securities assigned to him

Functions

Maintain current prices for their assigned securities

Act as an agent for floor brokers

Buy or sell from their own account when there is a temporary shortage of either

buyers or sellers

Bring buyers and sellers together






Participants

Financial Markets Infrastructure support


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Financial Markets - Infrastructure support

Exchanges

Facilitate efficient pricediscovery and reducescounterparty risk

Depositories/

CustodianBanks

Safekeeping ofsecurities andsettlement

Facilitate Post tradeand Asset servicingactivities.

Settlementand ClearingCorporations

Facilitate Settlement ofand clearing ofsecurities and funds






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ANY QUESTIONS ???

For any query/clarification requiredpls send a mail to Sahil Goyal [[email protected]]


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THANK YOU

1-5 PM - Intro to Capital Markets

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