Capital Market Theory

Topics: Stock market, Stock, Initial public offering Pages: 27 (7477 words) Published: July 30, 2013
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• CAPITAL MARKET AND ITS TYPES
• PUBLIC ISSUE
• PRIVILEGED SUBSCRIPTION
• REGULATION OF SECURITY OFFERINGS
• PRIVATE PLACEMENT
• INITIAL FINANCING
• SIGNALING EFFECTS
• THE SECONDARY MARKET
• PRACTICAL STUDY (MARI Gas Company Ltd)
o History and Background
o MARI Gas Field
o Regional Offices
o Management & Key Persons
o Equity & Finances
o Shareholding
o Return to Shareholders
o Gas Pricing
o Company Information as with ISE
o MARI’s 10 years at Glance
o Review of Theoretical and Practical Situation
CAPITAL MARKET THEORY: AN OVERVIEW

Capital market
The market for relatively long-term (greater than one year original maturity) financial instruments(e.g. bonds and stocks). It deals with bonds and stocks. Within the capital market there exists both a primary and secondary market. A primary market is a "new issues" market.

Primary market
A market where new securities are bought and sold for the first time (a "new issues" market). It flows from the buyers of securities (the savings sector) to the issuers of securities (the investment sector).

Secondary market
In a secondary market, existing securities are bought and sold. Transactions in these already existing securities do not provide additional funds to finance capital investment. Thus the existence of a strong secondary market enhances the efficiency of the primary market.

PUBLIC ISSUE

A large company typically raises funds both publicly and privately. With a public issue, securities are sold to hundreds, and often thousands, of investors under a formal contract overseen by federal and state regulatory authorities. A private placement on the other hand, is made to a limited number of investors, sometimes only one, and with considerably less regulation. An example of a private placement might be a loan by a small group of insurance companies to a corporation. Thus, the two types of security issues differ primarily in the number of investors involved and in regulations governing issuance.

When a company issues securities to the general public, it usually uses the services of an investment banker. It’s a financial institution that underwrites (purchases at a fixed price on a fixed date) new securities for resale. The investment banker acts as a middleman in bringing together parties who need funds with those who have savings. The principal function of the investment banker is to buy the new securities from the issuing company (at wholesale) and then resell them to investors (at retail). For this service, investment bankers receive the difference, or underwriting spread, between the price they pay for the security and the price at which the security is resold to the public. Because most companies make only occasional trips to the capital market, they are not specialists in the distribution of securities. On the other hand, investment banking firms have the expertise, the contacts, and the sales organization necessary to do an efficient job of marketing securities to investors. Because they are continually in the business of buying securities from companies and selling them to investors, investment bankers can perform this service at a lower cost than can the individual firm.

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Figure-(A)

….....Dotted line indicates the possible presence of a "standby arrangement."

Arrows indicate direction of money flow (securities flow in opposite direction).

-------Broken'line indicates that the financial intermediaries' own securities
(for example, savings accounts or insurance policies) flow to the
savings sector.

Note:-,No direct link exists between the investment sector and the secondary market; thus, previously issued securities sold in...
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