Capital Markets Of The World: Concepts, and Practice Questions

The Capital Markets of the world are different than those from India. The global financial system is vast and varied. It consists of many different types of financial institutions, as well as financial markets in stocks, bonds, commodities, and derivatives. Let us learn more about them.

What is a Capital Market?

The global capital market involves 46,000 traded stocks worth over $54 trillion. In 2012 the global bond market traded securities worth about $80 trillion, and the mutual fund industry traded about $26.8 trillion globally. Exchange-traded funds traded securities worth $2 trillion globally in 2012 and at the end of 2013, the total notional amount of over-the-counter derivatives was about $710.2 trillion globally.

The Capital Market is the marketplace where financial investments (normally of a long-term nature) can be acquired or disposed off. The term is used in the plural to signify separate market segments for various types of financial investments. The stock exchange (also referred to as the stock market) is where shares and bonds issued by
business entities (companies) are traded. There is sub-category called the Money Market, which is normally
the market for acquiring or disposing of very short-term financial investments but will include inter-bank
placement of very short-term deposits and dealings in currencies too.

Let us see some more terms that will come in handy later on.

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Equity Vs Debt

When we invest money with a business entity, it can either be in the capacity of becoming a partner in the business or we can lend money to the business entity for a defined time period.

Equity

In the first capacity, we participate in the ownership of the business and have an equitable right (legally enforceable right) in the business, to the extent of our share in it. Thus we become an “equity” or “share” holder – both terms are synonymous in the investment parlance. As an equity investor, we are entitled to distribution of profits and in the event, the business is liquidated at some stage, we are entitled to our share of the net assets left over.

Debt

In this case, we have a debt that we have to recover from the business in accordance with an agreed repayment schedule and we are entitled to compensation for the use of our money (interest, by whatever name called). The money we invest in government and banks is also in the category of debt. From the point of view of the borrowing entity, we are a creditor and we rank senior to equity in the event of liquidation i.e. creditors will be paid off first and whatever is left over after that will go to the equity holders (owners).

Forms of Investment

Capital Markets Of The World

Investments can be in various forms, some of these are real estate, business enterprises, precious metals and stones, valuable works of art, financial investments etc. Some forms of investment may have a non-financial reward too, such as aesthetic or emotional pleasure from works of art, jewellery, house property etc., but in most cases, we strive to at least retain the purchasing power of our savings (i.e. beat inflation) and preferably come out ahead.

Financial Investments

As opposed to physical assets, financial investments are generally a right or an entitlement to receive money (or streams of money). The Financial investments themselves are in two broad categories – direct investments, that we hand over to an obligor (the party that uses our money) and get back our entitlement (dividends, interest, principal etc.) from the obligor (Examples are bank deposits and investments in the National Savings Schemes) and market-based investments that we (normally but not always) take over from some other investor; and when we want to encash our investment, we find someone in the market to take over our investment from us.

Timeline Of Markets In Major Economies

United States

1964 – Interest Equalization Tax introduced.
1971 – NASDAQ system introduced. 1972 – IMM opens, trading FX futures.
1975 – deregulation of securities firms’ commissions; CBOT opens, trading interest rate futures.
1978 – International Banking Act.
1980 – DKA phases Reg. Q out by 1986.
1981 – International Banking Facilities. 1982 – Security Pacific is the first bank to set up a securities firm subsidiary; – currency options introduced.
1984 – 30 percent withholding tax on interest income aid to foreigners repealed.
1986 – N&E, AMX, NASD allow foreign issuers if they comply with home country laws; Government Securities Act.
1987 – CBOT begins evening trading.
1988 – Primary Dealer Act requires reciprocity before foreign financial institutions can become dealers in U.S. government security markets.
1989 – CFTC approves GLOBEX.
1990 – Rule 144a exempts from registration privately -placed debt and equity offered to qualified institutional buyers.
1991 – Multi-jurisdictional disclosure system with Canada.

France

1967 – Bank lending rates deregulated.
1984 – New Banking Law provides a unified regulatory structure; – foreign exchange controls rescinded, money market opened up.
1985 – CP market opens, but only to nonbanks; – capital market fees, taxes reduced, deregulated.
1986 – Computerized securities quotation and order system (CAC) introduced; interest rates on deposits longer than 3 months are liberalized;
1988 – New Stock Exchange Law: banks and other financial institutions can own securities companies; strengthened prudential rules for stock exchange members; – deregulation of commissions; OATS listed on the NYSE.
1990 – Virtually all exchange controls eliminated.
1991 – Reform of the market for negotiable credit securities; – regional stock exchanges lin& to Paris.
1992 – Completion of the electronic payment and delivery service for securities; – introduction of efficient payment and delivery system for ECU securities.

United Kingdom

1979 – foreign exchange controls abolished.
1982 – LIFFE opens.
1986 – “Big Bang”: negotiable commissions; dual capacity securities firms; other financial institutions can own securities firms; computer trading system modelled on NASDAQ; SEAQ International; improved trading and settlement systems for government securities.
1988 – Introduction of a comprehensive trade reporting system covering all markets in the U.K.

Practice Questions

Q 1: Choose the incorrect statement:

A) The Capital Market is the marketplace where financial investments are done.

B) The global capital market involves 46,000 traded stocks worth over $54 trillion.

C) A toothbrush is a form of investment.

D) The financial investments have to be in the form of some currency.

Ans: D) The financial investments have to be in the form of some currency.

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Capital Markets Of The World

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