Role of Participants in Capital Market

August 28, 2017 | Author: AbbyRefuerzoBalingit | Category: Capital Market, Securities (Finance), Financial Markets, Investment Fund, Stocks
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Role of Participants in Capital Market...


Development of Capital Markets Policy issues affecting development of capital markets Managing risks and responding to crises in Capital Markets Capital markets and housing finance Role of Participants in Capital Markets Regulators, financial institutions, accountants/auditors, government Issuers of securities in capital markets Investors in capital markets: individuals and institutional players Professionals: brokers, dealers, underwriters Financial intermediaries: commercial banks, merchant banks, mutual funds, hedge funds, insurance companies, pension funds Initial public offerings (IPOs) Who are the participants in the capital market? 1. Stock exchanges 2. Brokers 3. Sub brokers 4. Custodians 5. Depositories, depository participants 6. Merchant bankers 7. Bankers to the issue 8. Underwriters 9. Registrars to the issue 10. Portfolio managers 11. Mutual funds 12. FIIs 13. Debentures trustees 14. Credit rating agencies 15. Collective investment schemes 16. Venture capital funds Government Direct participant in the markets The government is a significant direct participant in capital markets. It participates in the money markets through the issuance of Reserve Bank and Treasury bills. The DMO issues domestic and foreign currency bonds, including the occasional issue of inflation-indexed bonds, on behalf of the core Crown. These entities, along with the DMO and the Reserve Bank, engage in portfolio risk transformation activities through the use of derivatives (primarily foreign exchange and interest rate forwards/futures and swaps). Government departments are also able to enter into agreements to hedge specific financial risks, usually foreign exchange exposures related to the purchase of fixed assets. Increasingly, departments and some Crown entities transact this business with the DMO, which then chooses whether or not to offset these exposures in the market.

Student loans advances can be interpreted as a substitute for private provision of capital, although this is somewhat simplistic since the advances are mostly funded by Crown borrowing.


Capital controls pital controls are measures imposed by a state's government aimed at managing capital account transactions - in other words, capital market transactions where one of the counterparties[13] involved is in a foreign country. Whereas domestic regulatory authorities try to ensure that capital market participants trade fairly with each other, and sometimes to ensure institutions like banks don't take excessive risks, capital controls aim to ensure that the macroeconomic effects of the capital markets don't have a net negative impact on the nation in question. Most advanced nations like to use capital controls sparingly if at all, as in theory allowing markets freedom is a win-win situation for all involved: investors are free to seek maximum returns, and countries can benefit from investments that will develop their industry and infrastructure. However sometimes capital market transactions can have a net negative effect - for example, in a financial crisis, there can be a mass withdrawal of capital, leaving a nation without sufficient foreign currency to pay for needed imports. On the other hand, if too much capital is flowing into a country, it can push up inflation and the value of the nation's currency, making its exports uncompetitive. Some nations such as India have also used capital controls to ensure that their citizens' money is invested at home, rather than abroad.

Major Categories of Investors, Issuers, and Intermediaries

Holdings of financial assets by the seven major categories of players in Q4 2004 were as follows: Control of Financial Assets: U.S. Capital Market Player Category

$ trillion

% of total

1 Households



2 Fund Managers



3 Bankers and Brokers



4 Corporate Managers



5 Foreign Investors



6 Government Officials



7 Insurance Executives Total Financial Assets of these Categories





The links, above, lead to a description of each player category, official Federal Reserve sector definitions, flow of funds and level tables, and off-site research resources.


- Diversified pool of investment opportunities - Better regulatory environment reduces credit risk from poor disclosure - Ability to share and transfer risk in market - Improve the overall pricing of credit risk Supranational organizations as issuers

- Put local bond market in the spotlight - Introduce international practices - Further develop financial infrastructure - Provide market with a globally recognized risk- free issue

Corporates as issuers

- Diversify source of financing - Access to long-term financing - Better risk management - Private Sector development - Add additional depth and liquidity to market Government as issuers

- Source of public funding - Set benchmark rates - Develop local capital markets - Contributes to sovereign ratings by international ratings agencies - Strengthens financial regulatory environment Capital Markets: Main Actors in the Market

Developed financial markets like the USA have evolved a range of financial institutions. They keep changing and innovating, while also introducing completely new institutions. The BiH financial market is

relatively under-developed and includes only certain basic types of financial institution. The main participants in the BiH capital market are:

The Securities Commission; The Securities Register; The investment funds (IFs); The fund management companies (DUFs); The brokerage houses; The depository banks; The custodian banks; Brokers and investment advisors.

Investment funds are financial institutions that issue securities to raise capital and invest in other companies. Under the FBiH and RS Acts on Funds, they also include any legal entity, company, or several property where, regardless of the legal form, participation is offered on the basis of shares or similar security with the aim of collecting deposits in cash and the express purpose of investing over 60% of these investments in a securities portfolio, money deposits, or other assets, so that investors do not supervise decisions on investment on a day to day basis and the basic aim is to secure a return on investment for investors, whether in profit or other form of benefit. In practice, these funds are organized as open-ended or closed investment funds. The key point about open-ended investment funds is that monies can be paid in or withdrawn at will. This mechanism involves changeable capital, e.g. when investors deposit monies, the fund capital (assets) increases, and vice versa, when they withdraw their monies, fund assets decrease. Closed investment funds have fixed capital deposited in the course of formation, i.e. establishment. This fixed capital does not change during the closed investment fund operations. A fund management company is a legal entity established as a limited-liability company or joint-stock company, whose activities include establishing and managing investment funds, i.e. investing funds for themselves and for the holders of share in open or closed investment funds, as well as other tasks set out in the law.

Brokering houses (brokerages) are legal entities licensed to perform brokerage tasks. These tasks include selling and buying securities for oneself or a client for a fee.

Depositary banks are institutions that perform the tasks of issuing securities and monetary transactions related to trading securities on the stock exchange or other regulated public market.

Custodian banks are institutions that provide the services of safekeeping securities, settling transactions, collecting revenues, representing clients, reporting on transactions, buying and safekeeping foreign treasury or corporate bonds, and providing information on local capital markets, etc. Custodial services are generally used by investment funds, insurance companies, banks, brokerages, and major companies.

Brokers are individuals who have passed the professional brokerage exam and have a license to perform brokering tasks. A broker is an authorized intermediary in securities trading acting in his own name for a client (commission agent) or in the client's name (agent). They mediate between the investor (buyer of goods or securities) and holder-owner (i.e. of goods or securities). Brokers charge a fee for their services, which is paid upon closing a transaction. Brokers are often confused with dealers, who perform the tasks of buying and selling securities for themselves in order to benefit from the price differential.

Investment advisors are individuals who have passed the professional exam for investment advisors. They perform provide advisory services to clients related to securities trading, investment in securities, and other securities-related transactions aimed at diversification and risk minimization or profit maximization.

Other important actors on the capital markets include the Securities Commission and the Securities Register, for which see above.

The Stock Exchange •

The Stock Exchange is a place where debt and equity securities of varying types are traded transparently.

It is a market that facilitates capital mobilization and allocation, as both governments and companies can raise funds through the market on long and most prudent terms through the offer of shares (by companies) and bonds (by companies and governments).

The facility, which the stock exchange provides for trading in existing securities, removes the restriction that would have prevented individuals from investing their savings in securities.

The opportunity it offers for subsequent trading in existing securities has made it a decisive factor in the success or otherwise of many corporate issues -

– The availability of a secondary market – that is, daily trading of securities on the stock exchange - engenders capital formation and socio-economic development.

Sets Rules and Regulations for Dealing Members

Licenses Dealing members

Listing Requirements for issuers of securities

Facilitates the secondary trading of securities

Mechanism for dispute resolution

Stock exchange

A market in which securities are bought and sold.

Makes it easy for investors to buy and sell securities in secondary markets.

Freeze active shares and debentures certificates in the safe custody.

Computerise trading

Credit dividend payment directly to the account of the shareholders in the bank through electronic clearing mechanism.

To act as a bank for shares .

Merchant banker •

Merchant Banks are a very important factor in the capital markets. They have a big role to play especially, in placing equity in the primary market, through the Initial Public Offers route.

The SEBI issued guideline for the merchant bankers in April 1990.

Merchant banker play major role is in the space of mergers and acquisitions

They will especially play a huge role in the hostile takeovers.

Underwriter •

Underwriting is like insurance against the failure of an issue .

For the risk that the underwriter takes, he is paid commission

Underwriting is a device that ensures the success of new issues

The SEBI has made it mandatory for issuing companies to underwrite all issues .

Venture capital •

Venture capital means funds made available for start-up firms and small business with exceptional growth potential.

Venture capital is the financial support to young , rapidly growing companies/individuals that have potential to develop into significant economic contributors by the business man group to create a product or service which has a unique idea

It helps to bridge the gap between capital and knowledge

Capital market intermediary •

Currently, these services or regulated activities include dealing in securities; trading in futures contracts; leveraged foreign exchange trading; advising on corporate finance; fund management; real estate investment trust management; securities financing; providing custodial services for securities; and providing credit rating services.

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