capital market management essay

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Theory of Capital Markets: A Review of Literature

The main purpose of this essay is to revisit the relevant theory and evidence regarding the informationally efficient capital markets. It explores the normative theory of perfect capital markets, the stochastic notion of random walk, the martingale theory, and various forms of market efficiency under the efficient markets hypothesis (EMH). It also summarizes a large body of empirical studies that has attempted to test how efficient the actual capital markets have been information-wise relative to the normative criteria. Despite empirical evidence against these theories, however, efficiency in capital markets still remains high in short horizons, provided also that competition for information is high, and that professional traders who employ certain trading rules should not consistently outperform the markets.

Related Papers

Martin Sewell

Abstract A market is said to be efficient with respect to an information set if the price 'fully reflects' that information set, ie if the price would be unaffected by revealing the information set to all market participants. The efficient market hypothesis (EMH) asserts that financial markets are efficient. On the one hand, the definitional 'fully'is an exacting requirement, suggesting that no real market could ever be efficient, implying that the EMH is almost certainly false.

Amarjeet Kumar

AAU Annals of Accounting, Educational & Social Research

Nuruddeen Abba Abdullahi

This paper presents a review of research done on the efficiency of the Nigerian capital market in the last ten years (2006 to 2015). The review surveys the growing body of empirical research on efficient market hypothesis as it relates to the Nigerian capital market. The research work is largely on empirical research studies that have been published in academic journals on the Nigerian capital market. This paper concludes that testing for market efficiency in and developing capital market is difficult and there is a high possibility that certain market imperfections could affect the informational efficiency of the market even at weak-form. The review reveals evidence is still mixed, which may be as a result of certain market imperfections, but the Nigerian capital market appears to be efficient at weak-form level.

tanvir hossain

Dr. Alex A. Ambore Bruce, PhD

Abstract: We examine and model the performance of Initial Public Offerings (IPOs) with the advent of the Automated Trading System (ATS) on the Efficient Market Hypothesis (EMH) of Fama (1970) and observe that the system of price determination and encoding such information to existing and potential investors for IPOs has significantly improved with related efficiency as most of the IPOs issued during the period after the introduction of the ATS havesignificantly attracted more investor demand and commendable pricing mechanism as a result of easy and quick access to information sharing. This could mean that information asymmetry has drastically reduced since they are electronically generated to produce the stock prices within a very limited period of time. But until now, prices of IPOs in most cases do not fully reflect available information as the EMH suggests and does not fulfilthe Random Walk Hypothesis (Kendall, 1953, RWH) asa requirement for weak form of market efficiency. However, despite the ATS’s immense contributions, the rate of price swings and inability to fully reflect available information still remains an apparition to the market participants so that prices are either overpriced or underpriced. We use the stability, stationary, and normality diagnostic tests together with the EGARCH and TGARCH to define the trend of the prices. The result is not consistent with the Efficient Market Hypothesis of Fama (1970). Data on each IPO daily prices were obtained from the trading statistics of Colombo Stock Exchange (CSE) consisting of 231 IPO stocks traded between the years 2000 to 2012 consisting of35,979 monthly observations; these prices are those of IPOs trading after the introduction of the ATS in 1997. The outcome clearly shows that the prices are not normally distributed and are significantly auto-correlated. This result does notsupport the RWH to satisfy for the weak market efficiency. Keywords: Initial Public Offering, Automatic Trading System, Efficient Market Hypothesis, Random Walk Theory, Colombo Stock Exchange, Stock Demand, Information Asymmetry and Stock Price

Universal Journal of Accounting and Finance

Muhammad Raquib

Dr. Warren Wu

This essay aims at reviewing the literature on and discussing two important new theoretical concepts recently proposed for investment analysis and portfolio management in capital markets. The first concept deals with the non-linear nature of actual security returns distribution which not only behaves log-normally but their variance distribution also has a fat tail and high peak, or leptokurtosis. This behavior of security returns contradicts the random walk hypothesis of efficient capital markets which assumes symmetric normality and finite variance. Actual security returns somehow follow other kinds of cross-sectional distributions called fractal distributions whose time-series are characterized by deterministic chaos. The second concept represents the attempts to model non-linearity in price and returns movements through the use of neural networks which are the high-speed artificial intelligence system capable of processing a large amount of market information simultaneously. Not only are these networks able to simulate complicated non-linear relationships among market factors but also learn to mimic the actual market behavior in order to predict the eventual results. Research in this area will enable financial economists to conduct capital market experiments in which their new financial/investment models can be tested without relying on the empirical data, which could be contaminated by undesirable factors.

Mustafa Okur

Abstract The efficient market hypothesis (EMH) has been the central proposition of finance since the early 1970s and is one of the most well-studied hypotheses in all the social sciences, yet, surprisingly, there is still no consensus, even among financial economists, as to whether the EMH holds. Five statistical analyses are conducted in an attempt to explicate such apparently contrary convictions.

Marshal Iwedi PhD

This paper examines whether the Nigerian capital market follows a random walk. In the course of this study, secondary data were sourced from the Nigerian stock exchange fact book and the partial autocorrelation was employed for the all share index proxy for stock price index. The result shows that the Nigeria capital market follows a random walk and is efficient in the weak form. Furthermore, the year 1987, the period of financial deregulation, 1988 when some public companies were privatized, 1995 the period of internationalization of the Nigeria capital market and the year 2000-2006 recorded persistent volatility clustering suggesting weak form inefficiency in the market for the years, springing up till 2008 of the stock price crash. Nevertheless, parameter estimates of their conditional mean equation excerpt 1995 were insignificant. Besides these years, other years were conspiously and significantly found to exhibit weak form efficiency. Thus, the Nigerian stock market is weak form efficient to beat the market and make abnormal profit.

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Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

Are You Retirement Ready?

Table of contents, what are capital markets.

Capital markets refer to the venues where funds are exchanged between suppliers and those who seek capital for their own use.

These venues may include the stock market , the bond market, and the currency and foreign exchange (forex) markets.

Capital markets are used primarily to sell financial products such as equities and debt securities .

Equities are stocks, which are ownership shares in a company, while debt securities, such as bonds, are interest-bearing IOUs.

Importance of Capital Markets

Capital markets are important for the economy, investors, and businesses for a variety of reasons.

They facilitate the process of capital formation, which is critical to economic growth. Capital formation refers to the process by which savings are transformed into investments, creating jobs and stimulating economic growth.

They enable businesses to access the capital they need to expand their operations and invest in new technologies. This creates jobs and generates economic activity, contributing to overall economic growth.

They allow investors to diversify their portfolios, reducing their exposure to any single asset or sector. This helps manage risk and can lead to more stable returns on investment.

By issuing stocks or bonds in the capital markets, businesses can raise funds for various purposes, such as expanding their operations, investing in new technologies, or acquiring other businesses.

How Does a Capital Market Work?

Capital markets function through the process of issuing new securities in the primary market and trading existing securities in the secondary market.

Here is a breakdown of how each of these markets works and an overview of market participants, market indicators, and market efficiency.

Primary Market

The primary market is where newly issued securities are sold for the first time. Companies issue securities such as stocks, bonds, and other financial instruments in order to raise capital.

Investment banks act as underwriters in the process of issuing securities. They purchase securities from the issuing company at a discounted price and then sell them to investors for a higher price.

The underwriter's role is to assess the risk of the issuing company and determine the appropriate price at which the securities should be sold to investors.

They will then market the securities to investors, who can be individuals, institutions, or other organizations. Once the securities are sold to investors, they are considered in the secondary market.

Secondary Market

The secondary market is where securities are traded between investors. This includes both public exchanges such as the New York Stock Exchange (NYSE) and over-the-counter (OTC) markets. In the secondary market, investors can buy or sell securities they already own.

The price of securities in the secondary market is determined by supply and demand .

When demand for a security increases, the price typically increases, and vice versa. Market participants such as brokers, dealers, and market makers facilitate trades between buyers and sellers.

Market Participants

Brokers act as intermediaries between buyers and sellers in the secondary market. They help investors buy and sell securities and charge a commission for their services.

They do not own the securities themselves but help facilitate trades between buyers and sellers.

Dealers buy and sell securities for their own accounts. They make money by buying securities at a lower price and selling them at a higher price.

Dealers typically specialize in specific types of securities, such as government bonds or corporate bonds.

Market makers are dealers that specialize in maintaining liquidity in certain securities. They provide a bid and ask price for the securities they specialize in and stand ready to buy and sell these securities at those prices.

Market Indicators

Market indicators such as stock indexes and bond yields are used to measure the performance of capital markets.

Stock indexes track the performance of specific stock markets or groups of stocks, such as the S&P 500 , which tracks the performance of the 500 largest publicly traded companies in the United States.

Bond yields measure the return on investment for a particular bond.

Market Efficiency

Market efficiency is the degree to which prices in the market reflect all available information. In an efficient market, prices will quickly adjust to new information as it becomes available, reflecting the true value of securities.

It can be measured by the speed and accuracy with which prices adjust to new information. If prices adjust quickly and accurately, the market is considered to be efficient.

If prices take a long time to adjust or do not accurately reflect new information, the market is considered to be inefficient.

Types of Capital Markets

The table below shows several types of capital markets, each with its unique characteristics and features. The most common types include equities, bonds, commodities, and currencies.

Understanding the different types of capital markets and the financial instruments traded in each market is essential for investors, companies, and other market participants to make informed investment decisions and manage their financial risks effectively.

Participants in Capital Markets

Participants in capital markets include a variety of individuals and institutions, each with a unique role and purpose. Here are the key participants in capital markets:

Investors are individuals or institutions that buy and sell financial securities to make a profit or achieve specific investment goals. There are three main types of investors:

Individual investors who buy and sell securities for their personal investment portfolios

Institutional investors or large organizations, such as pension funds, mutual funds , and hedge funds, that manage money on behalf of their clients or members

Foreign investors who invest in securities issued in that country

Investors play a crucial role in capital markets by providing the capital that businesses and other organizations need to grow and thrive.

Traders are individuals or firms that buy and sell securities on behalf of themselves or their clients for short-term gains. Traders use a variety of trading strategies, including:

Day Trading . This involves buying and selling securities within a single trading day.

Swing Trading . This involves holding securities for several days or weeks to capture short-term price movements.

Position Trading . This involves holding securities for several months or even years to capture long-term price movements.

Traders help create liquidity in the markets by facilitating the buying and selling of securities.

Investment Bankers

Investment bankers are professionals who help companies and other organizations raise capital by issuing stocks or bonds in the capital markets.

They play a crucial role in the primary market by underwriting new securities and helping companies navigate the regulatory requirements associated with issuing securities.

Regulators are government agencies or other organizations responsible for overseeing and regulating the capital markets to ensure fair and transparent trading practices. There are several types of regulators that oversee capital markets, including:

Securities and Exchange Commission (SEC) . A US government agency responsible for regulating securities markets and protecting investors.

Financial Industry Regulatory Authority (FINRA) . A non-governmental organization that regulates broker-dealers and securities firms in the US.

European Securities and Markets Authority (ESMA) . A regulatory agency of the European Union that oversees securities markets in Europe.

Regulators play a crucial role in maintaining the integrity and stability of the capital markets.

Financial Analysts

Financial analysts are professionals who analyze and interpret financial data and market trends to provide insights and recommendations to investors and other stakeholders .

They play a crucial role in helping investors make informed investment decisions and assessing the overall health of the capital markets.

Role of Capital Markets in the Economy

Capital markets plays a critical role in the economy by providing a platform for companies and other organizations to raise capital, allocate resources, manage risk, and promote economic growth.

Here are the key ways that capital markets contribute to the economy:

Capital Formation

Capital markets facilitate the process of capital formation by providing a means for companies and other organizations to raise capital through the issuance of stocks and bonds.

This, in turn, allows these organizations to invest in new projects, expand their operations, and create jobs, all of which contribute to economic growth.

Allocation of Resources

Capital markets helps allocate resources efficiently by directing capital to its most productive uses.

Investors allocate capital to companies and projects that are most likely to generate the highest returns, which helps ensure that resources are allocated efficiently and effectively.

Risk Management

Capital markets help manage risk for investors and businesses by providing a means to diversify their portfolios. Investors can allocate their capital across a range of assets, which helps reduce their exposure to any one asset or market.

Similarly, businesses can use derivatives , such as options and futures , to hedge their exposure to price fluctuations in commodities and other inputs.

Economic Growth

Capital markets promote economic growth by facilitating the flow of capital to its most productive uses.

By allowing companies and other organizations to raise capital and invest in new projects, capital markets help drive innovation and technological advancement, which in turn drives economic growth and development.

Challenges and Controversies in Capital Markets

While capital markets provide many benefits to the economy, they are not without challenges and controversies.

Here are some of the key challenges and controversies associated with capital markets:

Insider Trading

Insider trading is the practice of buying or selling securities based on non-public information, which gives the trader an unfair advantage over other investors.

Insider trading is illegal and unethical because it undermines the fairness and transparency of the capital markets.

Market Manipulation

Market manipulation refers to the use of fraudulent or illegal tactics to artificially influence the price of a security or market.

Examples of market manipulation include pump-and-dump schemes, spoofing, and front-running. Market manipulation can have a significant impact on the integrity of the capital markets and can harm investors.

Systemic Risk

Systemic risk refers to the risk that the failure of one institution or market could cause a broader collapse of the financial system.

This type of risk was a key factor in the 2008 financial crisis , which was triggered by the collapse of the subprime mortgage market.

Systemic risk can be difficult to manage and can have severe consequences for the economy and society.

Regulatory Issues

Regulating capital markets is a complex and challenging task, and regulators must balance the need for investor protection with the need to promote market efficiency and innovation.

Some of the challenges associated with regulating capital markets include keeping pace with technological advancements, ensuring fair and transparent trading practices, and preventing fraud and abuse.

Financial Crises

Financial crises can have a devastating impact on the economy and society, and they are often associated with capital markets.

The 2008 financial crisis was triggered by a combination of factors, including the collapse of the subprime mortgage market, excessive risk-taking by financial institutions , and inadequate regulation.

The consequences of financial crises can include widespread job losses, bankruptcies , and economic recession .

Benefits and Challenges of Capital Markets

Future of Capital Markets

The future of capital markets is shaped by various factors, including technological advancements, changing regulatory frameworks, globalization, and the growing importance of environmental, social, and governance (ESG) investing .

Technological advancements, such as blockchain and artificial intelligence, are transforming the way capital markets operate.

For example, blockchain technology has the potential to streamline the settlement process and increase transparency and security in transactions.

Artificial intelligence is also being used to analyze data and provide insights to investors, traders, and other market participants.

Regulatory frameworks are evolving to keep pace with the changing nature of capital markets. Regulators are increasingly focusing on issues such as cybersecurity, data privacy, and market manipulation.

In addition, there is a growing trend toward harmonization of regulations across different jurisdictions.

Globalization is having a significant impact on capital markets. With the increasing interconnectedness of the global economy, capital is being raised and allocated on a more international scale.

This has led to the development of new financial instruments and the expansion of existing markets.

ESG investing is becoming increasingly important in capital markets. This approach involves taking into account environmental, social, and governance factors when making investment decisions.

As more investors prioritize ESG factors, companies are under increasing pressure to improve their sustainability and corporate responsibility practices.

Final Thoughts

Capital markets play a vital role in the economy by enabling the exchange of funds between those seeking capital and those with capital to offer.

This exchange takes place through various markets, including the stock, bond, commodity, and currency markets.

Capital markets facilitate capital formation, which is crucial for economic growth, and also help in the allocation of resources and managing risks.

The participants in capital markets include investors, traders, investment bankers, regulators, and financial analysts. However, there are some challenges and controversies, such as insider trading, market manipulation, systemic risk, regulatory issues, and financial crises.

The future of capital markets is influenced by technological advancements, regulatory frameworks, globalization, and the increasing significance of ESG investing.

Seeking professional help from a financial advisor can be beneficial for investors and other market participants to make informed investment decisions and manage financial risks effectively.

Capital Markets FAQs

What are capital markets.

Capital markets are venues where funds are exchanged between suppliers and those seeking capital, such as the stock, bond, commodity, and currency markets.

What is the role of capital markets in the economy?

Capital markets facilitate capital formation, allocation of resources, risk management, and promote economic growth.

Who are the key participants in capital markets?

Key participants in capital markets include investors, traders, investment bankers, regulators, and financial analysts.

What are some challenges and controversies associated with capital markets?

Challenges and controversies associated with capital markets include insider trading, market manipulation, systemic risk, regulatory issues, and financial crises.

How is the future of capital markets shaping up?

The future of capital markets is shaped by technological advancements, changing regulatory frameworks, globalization, and the growing importance of ESG investing.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Future of Capital Markets: Problems & Solutions

Business professional assessing the future of capital markets

26 May 2022

Capital markets are crucial to a business’s financial structure. They fuel local and global economies, help allocate risk, and promote financial health and stability. These benefits offer opportunities for companies and individuals to profit.

To make successful investment and business decisions, you must understand the key players within capital markets and their roles.

Here’s an overview of how capital markets work, their common flaws, and how you can test and implement potential solutions to ensure economic and business success.

Access your resource today.

What Are Capital Markets?

Capital markets are financial markets where assets—such as stocks, bonds, and currencies—are traded, purchased, and sold between investors, business institutions, governments, and individuals.

Capital markets identify, and allocate assets to, the best ideas and businesses. They’re interconnected and can affect trading in markets across the globe. As a result, markets like the New York Stock Exchange (NYSE) and NASDAQ are highly organized and regulated to ensure efficient transactions.

Who Participates in Capital Markets?

Capital markets enable buyers and sellers to trade different forms of financial assets. There are several notable players in transactions:

Analysts: Equity analysts who evaluate companies and compare their current prices to estimated values to determine whether shareholders should buy, hold, or sell
Companies: Businesses that participate in capital markets to acquire assets to operate
Buy-side investors: Institutional investors , such as mutual funds, hedge funds, and pension funds
Sell-side institutions: Traders, salespeople, and investment banks
Households: Consumers who invest money in the market by buying or selling individual stocks

Types of Capital Markets

Beyond knowing the different players in capital markets, it’s important to understand which market they participate in. There are two types of capital markets: primary and secondary.

The primary market is overseen by the Securities and Exchange Commission (SEC). It comprises publicly held companies—those publicly selling stocks or bonds—selling securities to investors for the first time. Small-scale investors and households typically aren’t major players in this market because they’re unable to buy large amounts of stock at a time. Therefore, companies promote their securities to larger, more established institutions to ensure bigger returns.

The secondary market is essentially the stock market, where investors of all sizes and statuses trade companies’ previously issued securities among themselves. Companies don’t receive any direct profit from these market transactions since these stocks are traded among investors rather than the companies themselves.

Problems with Capital Markets

Although capital markets are crucial to the modern economy, they can fuel misinformation, greed, and economic downturn. These consequences are often perpetuated by businesses and investors using incentives, which can greatly influence the market.

For example, while bonuses and stock options can motivate investors and employees, they can also encourage unethical decision-making, contribute to pay inequality and turnover, and reduce intrinsic values. Moreover, equity analysts may feel pressured by companies to make extreme evaluations to establish job security.

Even more common is evaluating the market based on others’ feedback and analyses. While top analysts periodically assess the market using this method, doing so often leads to biased and inaccurate evaluations of capital markets. Two major problems arise from these evaluations: asymmetric information and the principal-agent problem.

Asymmetric Information

Asymmetric information occurs in a capital market when a buyer or seller is privy to more information on an investment’s historical, current, or future performance than the public. As a result, the investor can make a more informed and profitable investment decision than their peers.

This occurs when investors or employees within companies have access to proprietary and confidential information and misuse it for profit. Asymmetrical information often leads to imbalances within capital markets. In extreme circumstances, it can cause market failure, such as the 2007–2008 mortgage crisis .

Principal-Agent Problem

Another capital market dilemma is the principal-agent problem , in which conflicting priorities occur between an asset owner and the representative authorized to act on their behalf. Examples of principal-agent problems within business relationships are:

Shareholders vs. management teams
Financial institutions vs. rating agencies
Voters vs. politicians
Clients vs. lawyers

Companies can handle these problems in several ways. The most common include realigning organizational priorities, changing incentive systems, and improving the flow of critical information.

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Finding Solutions

There isn’t yet a clearly defined solution to common problems within capital markets. Many options have been tested that have both benefits and drawbacks.

Here are several ways organizations can better manage asymmetric information and the principal-agent problem within capital markets.

1. Board of Directors

Many companies try to combat capital market challenges by implementing a board of directors to oversee management and ensure shareholders’ interests are properly represented. The drawback is that management typically selects board members, which can lead to manipulation and bias.

2. Stock Ownership

To align business decisions and priorities, companies typically incentivize employees with stock offerings. This can motivate individuals to perform, managers to inspire their teams, and CEOs to make decisions that benefit their businesses and investors.

The downside is that CEOs can become risk-averse when making financial decisions—even when they benefit the organization—to protect their companies’ finances and share prices.

3. Punishments for Misrepresentation

Instead of implementing oversight or motivating leadership, some companies punish managers for misrepresentation. While this tactic can be effective, it can also lower morale and encourage managers to protect themselves by shying away from major decisions.

4. Taking Companies Private

Even if an organization is mature and publicly traded, private equity investors may remove companies from public exchanges through buyouts, then monitor capital markets to determine their next moves. This enables company leaders and investors to review and improve internal goals, controls, and processes, as well as reanalyze the markets and decide when, and if, their companies should go public again.

Yet, a company must be public for an investor to make money. Additionally, there’s no guarantee an investor won’t encounter the same issues of asymmetric information or principal-agent relationships—especially if they possess insider information.

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An Uncertain Future

Capital markets are critical to the world’s economy and offer businesses, investors, and individuals the opportunity to succeed financially. Without incentivization strategies to combat issues like insider trading and imbalanced relationships, capital markets can be tumultuous.

Google and Apple are examples of companies contending with growing market challenges. In 2012, Apple paid dividends to shareholders in tandem with profits due to a shareholder dispute. Google took a different approach and retained a large percentage of its ownership by using capital to reinvest in innovation. The company also gave shareholders more voting authority.

It’s unclear which of these approaches is best; their success can only be revealed over time. Given the state of the economy, it’s more important than ever to understand how financial markets work, recognize how to address their problems, and acquire the finance skills needed to ensure you make sound financial decisions .

Want to learn more about the future of capital markets and how it affects financial decision-making? Explore Leading with Finance —one of our online finance and accounting courses —to discover how the uncertainty of capital markets doesn’t have to impair your ability to make informed financial decisions. To continue building your financial literacy, download our free Financial Terms Cheat Sheet .

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An Overview

The Money Market

The capital market, key differences, regulation and oversight, the bottom line.

Investing Basics

Money Market vs. Capital Market: What's the Difference?

Money Market vs. Capital Market: An Overview

The money market is a part of the financial market where short-term borrowing and lending take place. In contrast, the capital market is where long-term securities are bought and sold. Let's dive into each market and their differences.

Key Takeaways

The money market is a short-term lending system. Borrowers tap it for the cash they need to operate from day to day. Lenders use it to put spare cash to work.
The capital market is geared toward long-term investing. Companies issue stocks and bonds to raise money to grow their businesses. Investors buy them to share in that growth.
The money market is less risky than the capital market while the capital market is potentially more rewarding.

The money market and the capital market are not single institutions but two broad components of the global financial system.

The money market is the trade in short-term debt. It is a constant flow of cash between governments, corporations, banks, and financial institutions, borrowing and lending for a term as short as overnight and no longer than a year. Meanwhile, the capital market encompasses the trade in both stocks and bonds. These are long-term assets bought by financial institutions, professional brokers, and individual investors.

Together, the money market and the capital market comprise a large portion of what is known as the financial market.

The money market is a good place for individuals, banks, other companies, and governments to park cash for a short period of time, usually one year or less. It exists so that businesses and governments that need cash to operate can get it quickly at a reasonable cost, and so that businesses that have more cash than they need can put it to use.

The returns are modest but the risks are low. The instruments used in the money markets include deposits , collateral loans, acceptances, and bills of exchange. Institutions operating in the money markets include the Federal Reserve, commercial banks, and acceptance houses.

When a company or government issues short-term debt, it's usually to cover routine operating expenses or supply working capital, not for capital improvements or large-scale projects.

The money market plays a key role in ensuring that banks, other companies, and governments maintain the appropriate level of liquidity on a daily basis, without falling short and needing a more expensive loan and without hoarding excess cash that isn't earning interest.

Individual investors may use the money markets to invest their savings in a safe and accessible place. Many choices are available, including mutual funds that focus on state money market funds, municipal funds, and U.S. Treasury funds. Many of the government funds are tax-free. A money-market fund also can be opened at most banks.

The capital market is where stocks and bonds are traded. Its movements from hour to hour are constantly monitored and analyzed for clues as to the health of the economy at large, the status of every industry in it, and the consensus for the short-term future.

The overriding goal of the institutions that enter into the capital markets is to raise money for their long-term purposes, which usually come down to expanding their businesses and increasing their revenues. They do this by issuing stock shares and by selling corporate bonds.

The capital market is roughly divided into a primary market and a secondary market. A company that issues a round of stock or a new bond places it in the primary market for sale directly to investors or institutions. If and when those buyers decide to sell their shares or bonds, they do so on the secondary market. The original issuer of those stocks or bonds does not immediately benefit from their resale, although companies certainly have an interest in the price of their stock shares rising over time.

The capital market is by nature riskier than the money market and has greater potential gains and losses.

Let's specifically highlight the key differences between capital markets and money markets.

Purpose and Function

As we've discussed throughout the entire article, money markets and capital markets serve distinct purposes. Money markets are primarily designed for short-term borrowing and lending, while capital markets cater to long-term investments,

Instruments

The financial instruments traded in money markets and capital markets are different. Money markets deal with short-term instruments that include Treasury bills, commercial paper, CDs, and bankers' acceptances. Capital markets involve long-term financial instruments such as stocks and bonds.

Market Participants

The participants in money markets and capital markets also vary. In money markets, the major players include commercial banks, central banks, money market mutual funds, broker-dealers, and large corporations. These entities go to money markets because they need short-term funding.

In capital markets, there's a broader range of users. Individual investors, institutional investors, pension funds, mutual funds, insurance companies, corporations, investment banks, or government entities may engage in capital markets. These participants invest in or issue long-term securities which may have larger, broader implications (therefore it caters to more participants).

Risk and Return

Money market instruments and capital market instruments differ in terms of risk. Money market instruments are generally considered low-risk due to their short-term nature and high liquidity. This means they generally will generate lower returns. Meanwhile, capital market instruments can range from low to high risk with the potential for higher returns. The longer investment horizon and the inherent risks in capital markets mean investors often demand higher returns.

Both money markets and capital markets are subject to regulation and oversight, though the focus and regulatory bodies differ. Money markets are typically regulated by central banks and other financial regulatory bodies to ensure stability.

Capital markets, however, are regulated by securities commissions and regulatory bodies such as the Securities and Exchange Commission (SEC). The SEC wants to ensure fair trading practices, transparency, and investor protection for security offerings in capital markets, so its goals are a little different than wanting to just ensure short-term liquidity oversight.

What Are Examples of Money Market Instruments?

Examples of money market instruments include certificates of deposit (CDs), commercial paper, Treasury bills (T-bills), and banker's acceptances.

What Are the Types of Capital Markets?

Capital markets can be broken down into primary and secondary markets. The primary market is where stocks and bonds are first issued to investors. The secondary market, on the other hand, is where securities that have already been issued are traded between investors.

What Are Specific Examples of Capital Markets?

Capital markets can include the stock market, the bond market, and the forex market . Each of these markets trades a different asset class.

The money market and capital market are often talked about. Together, they make up a large chunk of the global financial market. The key distinguishing factors are time and rewards. Money markets are made up of short-term investments carrying less risk, whereas capital markets are more geared toward the longer term and offer greater potential gains and losses.

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What are Capital Markets?

Meaning of Capital Market

Capital market is a financial market for long-term securities that includes both debt and equity. Companies and governments can raise long-term funds (more than a year) through this market. The capital market connects the surplus units with the deficit units. It means that the funds are channelized from those who have excess capital to those who need it.

Funds are raised by issuing capital market instruments like stocks and bonds. These instruments have a higher risk than money market instruments. However, at the same time, these instruments generate higher returns. These markets are strictly regulated in order to avoid any fraudulent practices. The Securities and Exchange Commission (SEC) regulates the capital or securities market in the USA.

Savings Mobilization

Formation of capital, rapid economic growth, benefits to investors, variety of services, liquidity of funds, public issue, private placement, rights issue, over the counter market, dealer market, functions of capital market.

The capital market plays an important role in the development of an economy. Let us discuss the functions of these markets for a deeper insight.

The capital market acts as a link between savers and entrepreneurial borrowers. It transfers money from savers (households) to entrepreneurial borrowers (companies who need capital). This way, these markets mobilize savings in an economy and divert them into productive investment. Productive usage of funds paves the way for economic growth and prosperity.

Also Read: Money Market vs Capital Market – All You Need To Know

Capital formation is the process of increasing the stock of real capital. It includes creating capital goods like factories, machinery, tools, equipment, etc. These capital goods are utilized for the production of other goods. Savings are mobilized through the capital market to various sectors, such as the agricultural sector, industrial sector, etc., in an optimal manner. Optimal allocation increases the rate of capital formation in an economy.

The allocation of capital is done optimally for better utilization of scarce resources. Improvement in capital goods increases the efficiency of labor. Superior and technologically advanced capital goods increase overall productivity. This increased productivity enhances economic growth.

In the capital market, investors are provided with an avenue for long-term investments. Most importantly, investors are offered a wide variety of instruments like bonds, mutual funds, insurance policies, equities, etc. This enables investors to diversify and channelize their savings into the most profitable avenues. To protect investors from any unscrupulous activities, these markets are strictly regulated.

The capital market provides a wide array of services. Services such as underwriting, export finance, consultancy, merchant banking, credit rating, etc., are offered to investors.

Also Read: Financial Markets – Functions, Importance And Types

In this market, funds are available for long-term investments. Because of organized stock and other exchanges, both security sellers and buyers are readily available. This makes the capital market a liquid market as funds are available continuously.

Types of Capital Market

Capital Markets are classified into two major markets: Primary Market and Secondary Market .

Primary Market

The market in which securities are issued for the very first time to the investors is known as the Primary Market or the New Issue Market. The main role of the primary market is capital formation.

A company raises capital by issuing securities such as shares or bonds in the primary market. The investors who invest in the new issue of the company become the shareholders of the company. In the primary market, the transactions directly occur between the company and the investors. The money invested by the investors in the primary market directly goes to the company.

A company can raise funds from the primary market through various methods like Public Issue, Private Placement, Right Issue, etc.

Public issue or Initial Public Offering is the process of issuing shares to the public for the first time.

A private placement is the offering of shares to a few selected investors. These selected investors could be mutual funds, venture capital, banks, insurance companies, etc.

Rights Issue or Rights Offer is a way through which a listed company raises capital by offering shares to the existing shareholders. For example, XYZ company comes out with a 1:2 right issue. This means that XYZ shareholders can buy an extra share for every 2 shares they have. Usually, the stocks issued in the form of the right issues are lower priced than the prevailing market price of the share.

Secondary Market

Trading of previously issued securities takes place in the secondary market . An Investor can directly buy a share from the seller. The secondary market has a huge volume and magnitude of transactions that affect the primary market.

The secondary market includes both stock exchanges and the over-the-counter market . Some of the popular stock exchanges are the London Stock Exchange (LSE), New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE), etc.

There are two types of a secondary markets. They are the Over-the-Counter market and Dealer Market.

Over-the-counter or Off-exchange trading is a form of decentralized trading of securities. Trading of securities takes place directly between the parties. The buyers and sellers openly announce the prices at which they are willing to sell or buy securities. It is less transparent than exchanges.

In the dealer market, the buyers and sellers do not gather in a commonplace physically. The brokers and the dealers act as an intermediary between the buyers and the sellers. A lot of dealers exist in this market. Therefore, due to competition, dealers offer the best price to the investors.

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Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

1 thought on “What are Capital Markets?”

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Capital Market: Meaning, Structure, Instruments, Roles & More

The Capital Market, as a crucial segment of the financial market, is integral for channeling capital between investors and borrowers. Understanding the its functioning is essential for developing a grasp of the Indian Financial System. This article of NEXT IAS aims to study in detail the Capital Market, including its meaning, components, structure, types, roles, regulations, and other related concepts.

What is Capital Market?

Thus, it caters to the borrowing needs for medium to long term projects and investments.
Because of the long maturity period, the Capital Market facilitates the mobilization and allocation of long-term funds.

– is a broad term, referring to any center or arrangement where buyers and sellers participate in the trade of financial claims such as equities, bonds, currencies, and derivatives.
– The Financial Market is classified into
A. – Market for trading
B. – Market for borrowing and lending of

Components and Structure of Capital Market

The capital market is a complex system, formed by various components. Various components and structure of capital market can be classified into the following 3 categories.

Capital Market Participants

Capital Market participants include the individuals and institutions that interact within the market. These participants can be, broadly, categorized into 2 groups:

Investors or Suppliers of Capital : These are entities with surplus funds and are looking to invest. They include individuals, pension funds, insurance companies, and commercial banks.
Borrowers or Issuers of Securities : These are entities that raise funds by issuing various types of securities. They include businesses looking to expand, governments financing projects, and individuals seeking loans.

Capital Market Instruments

Capital Market Instruments or the Instruments of Capital Market refer to various types of financial tools used within the market. They include financial securities and derivatives that serve as mediums and facilitate the flow of money among the participants of the capital market.

Various capital market instruments can be, broadly, classified into the following types:

Share or Stock
Debt Instruments
Derivatives
Mutual Funds
Exchange Traded Funds (ETFs)
Instruments of Foreign Investments

Each type of capital market instrument has been discussed in detail in our article Instruments of Capital Market.

Capital Market Infrastructure

Capital Market Infrastructure refers to the institutions that facilitate the smooth operation of the market. These institutions play a crucial role in connecting various participants and ensuring their regulated interactions for trading through instruments available in the market.

Major types of institutions forming part of the capital market infrastructure are as follows:

Various concepts regarding Stock Exchanges have been dealt with in detail below.
Securities and Exchange Board of India (SEBI)
Reserve Bank of India (RBI)
Union Ministry of Corporate Affairs, and
Department of Economic Affairs, Union Ministry of Finance.
Brokers, investment banks, and underwriters are some examples.

Types of Capital Market

Based on the type of securities traded, the Capital Market is of 2 types:

Primary Market or New Issue Market

Thus, it is also called the New Issue Market.
In other words, the market wherein resources are mobilized by companies through the issue of new securities is called the primary market.

Secondary Market or Old Issue Market

Thus, it is also called the Old Issue Market.
The secondary market enables securities holders to adjust their holdings in response to changes in their assessment of risk and return or to buy/sell their securities as per their liquidity needs.

Difference between Primary Market and Secondary Market

Primary Market	Secondary Market
New market securities are sold.	Only existing securities are traded.
Investors have the option of only buying the securities.	Investors can both buy and sell securities.
The price of securities is mostly decided by the management of the issuing company.	The price of securities is determined by the demand and supply of the market.
Primary Markets have no fixed geographical location.	Secondary Markets are located at specified places, known as Stock Exchange.
Major intermediaries – Merchant Banks, Underwriters, Debenture Trustees, Portfolio Managers, etc.	Major intermediaries – Brokers, Jobbers, etc.

The functioning dynamics of both types of markets are discussed in detail in the sections that follow.

Primary Market or New Issue Market: Concepts

Types of issues in primary market.

The issue of new securities in the Primary Market occurs through various methods as discussed below.

Public Issue or Public Offering

Public Issue or Public Offering refers to the process of a company offering its securities (usually stocks or bonds) for sale to the general public for the first time or subsequently.
It is the usual way through which companies raise capital from a broad range of investors.
There are 2 main types of public issues:

Initial Public Offering (IPO)

Initial Public Offering (IPO) refers to the process when a private or unlisted company sells its shares to the public for the very first time.
This is why an IPO is also referred to as “ going public ”.
It is generally used by new and medium-sized firms that are looking for funds to grow and expand their business.
Those shares can be further sold by investors through secondary market trading.

Follow on Public Offering (FPO)

Follow on Public Offering (FPO) refers to the process when a company, that has already issued shares and is listed on a stock exchange, issues shares again to raise additional fund.
Public companies have to sell at least 25% of their shares to the public to be traded on a stock exchange. Usually, it is this requirement that makes companies go for FPOs.

Offer For Sale

Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers.
In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the investing public.

Bonus Issue or Scrip Issue or Capitalization Issue

It refers to offer of share to the existing shareholders against their distributable profit.
Thus, under this, shareholders’ share in profit is converted as shares.

Rights Issue

Rights Issue is an invitation to existing shareholders to purchase additional new shares in the company.
That’s why it is called Rights Issue.

Private Placement

When an issuer makes an issue of securities to a limited group of pre-selected investors, and which is neither a rights issue nor a public issue, it is called a private placement.

Private placement can be of 2 types:

Preferential Allotment

When a listed issuer issues shares or convertible securities to a select group of persons , it is called a Preferential Allotment.

Qualified Institutional Placement (QIP)

When a listed issuer issues shares or convertible securities to a select group of Qualified Institutional Buyers (QIBs), it is called a Qualified Institutional Placement (QIP).

Key Terminologies Related to Primary Market

Declared price issue.

Its a method of pricing new issues wherein the issuer offers securities at a pre-fixed price.

Book Building Issue

Its is another method of pricing new issues wherein the price is not announced beforehand. Rather, the issuer, first, offers the shares and gets application from public and then based on the demand fixes the price.

Authorized Capital

It is the maximum amount authorized by Memorandum of Association of a company that can be raised by the company. The issuer can issue securities upto worth this amount only.

Issued Capital

It is the actual amount issued by the issuer. It may be equal to or lesser than the Authorized Capital.

Subscribed Capital

After the company issues shares, the public starts subscribing to those shares. The subscription can be oversubscribed (demand of shares more than the issued number of shares) or undersubscribed (demand of shares less than the issued number of shares). The actual amount subscribed is called Subscribed Capital.

Merchant Bankers

A “merchant banker” means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management.

Underwriting

Underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.

Underwriter

The financial intermediary which agrees to purchase the undersubscribed portion of issued capital is called Underwriter.

Called Up Capital

The company usually collects the subscribed capital in installments. The portion of money demanded from subscriber is known as Called Up Capital.

Paid Up Capital

The amount actually paid by subscribers, when the money is demanded by the issuer, is known as Paid Up Capital.

Reserve Capital

Usually, the issuer does not demand the whole amount from the subscriber. A small portion of money is left un-demanded, which is called Reserve Capital.

Secondary Market or Old Issue Market: Concepts

Components of secondary market.

Based on the type of trading, the secondary market has 2 components:

Over-The-Counter (OTC) Market

Over-The-Counter Markets or OTC Markets are essentially informal markets for trading securities.
It is a decentralized marketplace where securities are traded directly between two parties, bypassing a central exchange.
OTC markets are generally subject to less stringent regulations than exchanges.

Stock Exchange Market

It refers to markets for trading of securities through a centralized exchange, usually called Stock Exchange.

Key Terminologies Related to Secondary Market

Listed securities.

Listed Securities refer to those securities that are accepted to be traded in stock exchanges.

Cash Trading

Its a type of trading in the Secondary Market wherein the sale and purchase of securities takes place at the prevailing price on the day of trading.

Forward Trading

Its another type of trading in the Secondary Market wherein both buyer and seller agree to buy and sell respectively at a future date at a pre-agreed price, irrespective of the price that prevails on the day of trade.

Third Market

Third Market refers to the trading of exchange-listed securities in the over-the-counter (OTC) market.
It allows institutional investors to trade blocks of securities directly, rather than through an exchange, providing liquidity and anonymity to buyers.

Fourth Market

Fourth Market refers to institution-to-institution trading directly, without using the service of broker-dealers, thus avoiding both commissions, and the bid–ask spread.

Stock Exchange

It acts as a central hub for facilitating stock trading in a secure and efficient manner.
In India, a Stock Exchange can operate only if it is recognized by the Government under the Securities Contracts (Regulation) Act, 1956.

Stock Exchanges of India

Bombay stock exchange (bse).

The Bombay Stock Exchange (BSE) is India’s largest and earliest securities market.
It is also Asia’s first stock exchange.
BSE On-Line Trading (BOLT) is a screen-based automated trading platform of BSE.
The BSE also offers depository services through one of its arms called the Central Depository Services Limited (CDSL)

National Stock Exchange of India Ltd. (NSE)

The National Stock Exchange of India Ltd. (NSE) is India’s largest financial market.
It ranks fourth in the world by equity trading volume.
NSE is the first exchange in India to provide modern, fully automated electronic trading.

Stock Market Index

A Stock Market Index is a statistical measure that reflects the overall performance of a specific segment of the stock market, or the entire market itself.
Each index is composed of a weighted values of specific group of stocks chosen based on certain criteria such as Market Capitalization, Representation of various sectors, etc.
These companies are called Blue Chip Companies.
It acts as an indicator of rise or fall in the prices of shares or other securities.
Investors use Stock Market Indices as a benchmark to track market movements and compare the performance of their investments.

Important Stock Market Indices in India

Bse sensex or sensitive index.

It is an index of BSE, which measures the price movement of top 30 companies’ shares.

Nifty or National Index for Fifty

It is an index of NSE, which measures price movement of top 50 companies.

Nifty Junior

It is an index of NSE, which measures the price movement of the next top 50 companies.

Roles and Importance of Capital Market

The Capital Market, as the major channel for mobilization of funds, plays very crucial role in an economy. Some of the its major roles and importance can be seen as follows:

Mobilization of Savings : It mobilizes idle savings or funds from people for further investments in the productive channels of an economy.
Capital Formation : Through mobilization of ideal resources it helps in formation of capital.
Investment Avenues : It enables to raise resources for longer periods of time. Thus it provides an investment avenue for people who wish to park their resources for a long period of time and earn reasonable return.
Economic Growth and Development : As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. This, in turn, helps them grow.
Optimal Allocation of Fund : By enabling price discovery as per the demand and supply, it helps in optimal allocation of financial resources.
Service Provision : As an important financial set up, capital market provides various types of services. It includes long term and medium term liquidity to industry, underwriting services, consultancy services, export finance, investor education by widening ownership base.
Barometer of Economic Health : The performance of the Secondary Market acts as the barometer of economic health. The investors use the level of stock exchange indices as a benchmark to track market movements and compare the performance of their investments.

Regulation of Capital Market in India

stock exchanges – through a process of recognition and continued supervision.
contracts in securities, and
listing of securities on stock exchanges.
The Companies Act is mainly administered by the Union Ministry of Corporate Affairs.
SEBI Act, 1992 : It has established the Securities and Exchange Board of India (SEBI) as the primary regulator of securities markets in India.
Depositories Act, 1996 : It provides a legal framework for establishment of depositories to facilitates holding of securities in physical/dematerialised form and to effect the transfer of securities through book entry only.
RBI’s Provisions for NBFCs : Of late, the RBI has proposed a significant shift in its regulatory approach towards the NBFCs.

The Capital Market serves as a vital channel for mobilizing savings into investments, and hence driving economic growth and prosperity. As India aims to grow faster in the time times to come, the role of the Capital Market is going to become even more important. Efforts should be taken to ensure its efficient functioning by focusing on transparency, fairness, and regulatory oversight to maintain investor confidence and market integrity.

Related Concepts

Qualified institutional buyers (qibs).

Qualified Institutional Buyers (QIBs) are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets.
Some prominent examples of QIBs are – Insurance companies, provident funds, pension funds.

Commodity Exchange

A commodity exchange is an exchange where various commodities, derivative products, agricultural products and other raw materials are traded.
The commodity exchanges in India includes – National Spot Exchange Limited (NSEL), Indian Commodity Exchange Limited (ICEX), Multi Commodity Exchange (MCX), etc.
Earlier, they were regulated by the Forward Markets Commission (FMC), which got merged with the SEBI on September 28, 2015.

FAQs on Capital Market

What is indian capital market.

Indian Capital Market is a component of Indian Financial Market which provides a market for borrowing and lending of medium and long-term funds, above 1 year.

Who controls the Capital Market in India?

The Indian capital market isn’t controlled by a single entity, but rather overseen by a number of regulatory bodies, including Securities and Exchange Board of India (SEBI), Union Ministry of Corporate Affairs, Reserve Bank of India (RBI), etc.

Who regulates the Capital Market in India?

There are several bodies involved in regulation of Capital Market in India. They include – Securities and Exchange Board of India (SEBI), Union Ministry of Corporate Affairs, Reserve Bank of India (RBI), etc.

Why do we need Capital Market?

The Capital Market is the major channel for mobilization of funds from investors to borrowers.

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Goods and Services Tax (GST): Evolution, Features, Benefits & More

Essay on Capital Management

Capital management is a broad concept that plays a pivotal role in ensuring the smooth running of the business. The main objectives of capital management are to ensure that the business runs effectively and operationally. This case scenario presents two viable investment opportunities. The first investment opportunity focuses on investing in Hampshire Inn Inc. (NHI), where Larry needs to become an 8% equity owner of the company. The second viable opportunity involves becoming an equity owner of Vermont Inn Inc. (VI – 8%). These investment approaches utilize two common working capital, management models. The first model is the Weighted Average Cost of Capital which indicates the rate expected to be paid by the company. A lower WACC portrays a good investment chance of attracting potential investors at a lower cost. The value of WACC is 12.5% for VI, while that of NHI was 17.5%, despite having a high WACC compared to that of the industrial average (S&P 500).

On the other hand, an investment opportunity with a high expected return rate is considered good for investment. CAPM is the second approach utilized under working capital management. The model assists investors in measuring what sort of investment provides a good investment opportunity. Investments that have a high expected return are considered good for investment. Under this approach, Larry should consider investing in VI due to its high expected rate of investment return.

The study utilizes several assumptions under capital management. These assumptions are the expected return, and WACC estimates represent a long-term risk and return forecast for every opportunity.

Capital management plays a pivotal role in ensuring that the organization runs efficiently. The management normally uses this aspect to make short-term decisions. It simply ensures that all the business’s current assets and liabilities are effectively used through monitoring and control. Skills under capital management are essential in investment analysis. However, capital management depends on various factors hence varies from firm to firm (Pettengill et al., 2020). These factors include the nature of business, supply chain conditions, marketability conditions, and seasonality and production policies. If these aspects are carried out efficiently and effectively, an organization portrays growth and good health. Most organizations invest in short-term operations for long-term investments and purposes.

As the name suggests, working capital management adopts “working capital” for investment activities. Working capital simply means all aspects involved in current assets and current liabilities. These are simply short-term operations. An organization should be sufficiently liquid to venture into investment activities. This means that the firm should meet its short-term obligations. Hence the current ratio should be not less than one. The current ratio is calculated by dividing all the current assets by the current liability. It shows how an organization is liquid to pay off its short-term debts effectively (Wurstbauer et al., 2016).

Under this scenario, there are two investment opportunities. The first opportunity relates to becoming an equity owner of New Hampshire Inn Inc. (NHI). This business is under 100% equity with no debt. Projected earnings before interest and tax accumulate to $600,000, which is a good figure. The marginal tax rate is roughly 24%, and lastly, the company has a market value of equity worth USD 4.8 Million. The second investment opportunity is investing in Vermont Inn Inc. (VI). This business operates under both equity and debt. The capital structure consists of 63% equity and 37% debt. The projected earnings before interest and tax equal that of NHI, $600,000, and a marginal tax rate of 24%. However, this business operates under bond, with a stated coupon rate and market rate of 6% and a market value of USD 2 Million. VI has a current market value of equity worth USD 3.428 Million.

There are two main approaches to determine the best viable investment for Larry. These approaches include determining viable investment opportunities through WACC and CAPM methods.

Weighted Average Cost of Capital (WACC).

WACC simply represents the average cost of all capital sources within an organization. These capital sources include bonds, common stock, and other forms of debt. The approach is commonly used in determining the required rate of return. This aspect expresses the return of each bond that each shareholder demands. When the value of WACC is high, it means that an organization entails a volatile stock; hence investors might demand a high return on their investments. In investment analysis, WACC plays a vital role for various reasons.

Most importantly, this approach analyzes the potential benefits of acquiring another business through taking on investment decisions. For example, in merging companies, the company with a high WACC can obtain the other company, hence becoming a good choice. If the management obtains a potential fall-out in this model, there are high possibilities of the company having a shortfall; hence might opt to invest their capital on other projects.

Moreover, if an organization depends on one source of financing – common stock- there is simplicity in calculating WACC. For example, suppose an investment opportunity has a 5% rate of return. In that case, this means that the organization’s cost of capital will be equal to the cost of equity obtained through the investment – say, 5%. This is equally true in debt financing. If an organization’s average yield is 10% in the payment of outstanding bonds, then the cost of debt will be equal to the average yield – say, 10%. The calculation of WACC is simplified to ensure that all the costs of equity and debt are put in place. The formula is given as:

Where T is the corporate tax rate, this formula is used in the investment analysis in this scenario.

In the first investment opportunity, under NHI, the breakdown is as shown in the table below:


Market Value of Equity	E	4,800,000
Market Value of Debt	D	0
Total Market Value	V	4,800,000
Cost of Equity	Re	100%
Cost of Debt	Rd	0%
Corporate Tax Rate	T	24%

The calculations are as follows:

The value of WACC under the NHI investment approach is 100%. This means that the organization’s capital structure is equal to the cost of equity – say, 100%. However, to get a more detailed view of the capital structure of this investment, altering the capital structure might affect the overall decision made by an investor. Given the premises of the organization’s market value and the present value of any future cash flows, then the value of WACC can be obtained through a second option. This approach gives the company’s market value using future cash flows discounted by the Weighted Average Cost of Capital. Hence;

The value of WACC under this scenario is 12.5%. This value is considered favorable. Under the rule of thumb, a good WACC should be in line with the industrial average. Considering these investment decisions fall under the S&P 500 industries, the industrial WACC average is 6.6%. Therefore, this investment decision has a high WACC than the industrial average. This means that the organization should make investments greater than 12.5%, as stipulated in the calculations.

In the second investment decision, the crackdown is similar to NHI investment. However, there is a slight difference in the cost of equity and debt. NHI is financed by equity alone, whereas the VI is financed by equity and debt, with rates accumulating 63% and 37%, respectively. The breakdown is shown in the table below.


Market Value of Equity	E	3,428,000
Market Value of Debt	D	2,000,000
Total Market Value	V	5,428,000
Cost of Equity	Re	63%
Cost of Debt	Rd	37%
Corporate Tax Rate	T	24%

The value of WACC under this approach in this investment is 50.15%. This means that the management needs to make investment decisions greater than the value of WACC for profitability. This value is extremely high considering that a high WACC is unfavorable for investment decisions. This approach is essential, indicating that the return on investment might be attributed to both debts and external equity (Pettengill et al., 2020). However, using the market value approach, the estimated value of work seems to be less. The market value of this company is USD 3.4278 Million. Future cash flows are equal to NHI – say, USD 0.6 Million. Therefore, the estimated WACC will be:

Under the VI investment approach, WACC is better than that of the NHI investment opportunity. However, the value is greater than the average industrial average under S&P 500 organizations –6.6%.

Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) is a financial metric that examines the financial market price securities and their expected returns. The objective character of the anticipated value of equity that the model may produce is a major advantage of CAPM. Because CAPM reduces the complexity of financial markets, it cannot be employed in isolation (Sattar, 2017). However, in their efforts to establish the accurate and effective cost of equity assessments, financial managers might use it to enhance other methodologies and judgments. The modern financial theory is now routinely used in investment management, despite application continuing use to stir heated discussion. The same strategies are increasingly being used to solve difficulties in corporate finance. The backlash is expected to be just as ferocious. The capital asset pricing model, or CAPM, encapsulates the notion (Sattar, 2017).

The modern financial theory is based on two assumptions: (1) financial market is highly competitive and efficient (that is; relevant information about companies is widely disseminated and absorbed); and (2) these markets are monopolized by rational, risk-averse venture capitalists seeking to maximize satisfaction from investment returns (Wurstbauer et al., 2016). The first presumption assumes a financial market filled with highly intelligent, well-informed sellers and buyers. The second assumption applies to investors who value wealth and would rather have more than less. Furthermore, in current financial theory, hypothetical investors seek a charge in the form of higher projected returns for the risk they are taking. The two assumptions are common in the calculation of CAPM. They are the cornerstones of the modern financial theory with limited assumptions (Wakil, 2012). If the money had not been invested in LIIX, it would have been invested in a mutual fund that mimics the S&P 500. If LIIX needs any additional funding for the investment, it can borrow from the 2nd National Bank of Evening Shade at 4.5%. LIIX is in the 17% marginal tax bracket. Currently, the 90-day Treasury bill rate is 0.25%, the 5-year Treasury Rate is 1.75%, and the 10-year Treasury rate is 2.95%. The S&P 500 is expected to return 9.25% in the upcoming year. NHI has a Beta of 1.25, while the Beta for VI is 1.80. The Beta for LIIX is 1.45.

This model deals with the risk and return of financial securities in portfolio investments. It examines the rate at which an investor receives after buying the common stock and holding it for longer periods through capital gains. The formula for obtaining the expected Capital asset return is given as:

Where is the risk-free rate, Is the expected return in the market, and the Beta value represents the sensitivity of the risk.

In the first investment opportunity, NHI, the value breakdown is as follows:


Risk-Free Rate		4.5%
Sensitivity		1.25
Expected Return in the Market		9.25%

In the second investment, VI, the Expected return will be:


Risk-Free Rate		4.5%
Sensitivity		1.80
Expected Return in the Market		9.25%

The second investment has a high expected rate of return than the first investment. A high CAPM rate is considered a more risky investment than a lower CAPM rate. If the model considered a beta value for LIIX, 1.45, then the value of CAPM at 8% shareholding would be:

The second investment has an equal expected rate of return similar to Larry’s Investment Company. This model indicates that Larry should go for the second investment, despite having a high risk. This investment portrays a greater potential in the rate of return.

In a nutshell, Larry should focus on the opportunity with a high rate of return. The VI entails a lower WACC than the first investment opportunity, NHI. This portrays a viable investment opportunity for LIIX Company. Moreover, investing in VI has a higher CAPM value than NHI. According to the rule of thumb, a good investment should have a high expected rate of return despite the high potential risk. Therefore Larry should go for VI investment, and NHI should be an opportunity cost for this approach.

Pettengill, G. N., DeBondt, W. F., Hur, J., & Singh, V. (2020). The intricate relation between return, market value and past performance of common stocks in the United States 1926-2006. SSRN Electronic Journal . https://doi.org/10.2139/ssrn.1930216

Sattar, M., & -, J. (2017). CAPM vs Fama-French three-factor model: An evaluation of effectiveness in explaining excess return in Dhaka stock exchange. International Journal of Business and Management , 12 (5), 119. https://doi.org/10.5539/ijbm.v12n5p119

Wakil, G. (2012). Value relevance of firm size proxies in predicting stock returns: Market capitalization or total book assets? SSRN Electronic Journal . https://doi.org/10.2139/ssrn.2100394

Wurstbauer, D., Lang, S., Rothballer, C., & Schaefers, W. (2016). Can common risk factors explain infrastructure equity returns? Evidence from European capital markets. Journal of Property Research , 33 (2), 97-120. https://doi.org/10.1080/09599916.2016.1169211

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Essay on Capital Market | India | Markets| Financial Management

Here is a compilation of essays on ‘Capital Market’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Capital Market’ especially written for school and college students.

Essay on Capital Market

Essay Contents:

Essay on the Recent Changes in Capital Market

Essay # 1. Meaning of Capital Market:

Capital market is a central coordinating and directing mechanism for free and balanced flow of financial resources into the economic system operating in a country. It is an organised market mechanism for effective and efficient transfer of money capital or financial resources from the investing classes to the entrepreneur classes in the private or public sectors of our economy.

Capital market is directly responsible for two activities:

1. Mobilisation of national savings for economic development.

2. Mobilisation and import of foreign capital and foreign investment.

A nation embarking upon accelerated economic development and industrialisation has to make planned efforts to develop organised and healthy money and capital markets with an adequate institutional set-up.

Market for credit and business enterprises must go hand-in-hand to ensure quick industrialisation in a developing democratic country.

Demand for money capital come from:

(i) Public sector-government, state enterprises;

(ii) Private sector-agriculture, industry, commerce and consumers.

Supply of money-capital is made by:

(i) Investing public,

(ii) Investment intermediate,

(iii) Institutional investors,

(iv) Financial institutions,

(v) Commercial banks, and

(vi) Government.

The capital market is a mobiliser and distributor of money-capital:

(a) a national savings, and

(b) foreign capital.

It provides medium-term and short-term funds to industries. It deals in long-term debts and equity funds. It is a ready supplier of shares, debentures and debts at a fair rate in any magnitude.

Essay # 2. Features of Capital Market:

The distinctive features of Indian capital market may be summed up as follows:

1. An unorganised capital market existed before independence for lack of industrialisation in India.

2. The capital market scenario changed in 1948 with the establishment of the Industrial Finance Corporation of India through which the Government instituted facilities for providing long-term financial assistance.

3. The securities in the form of shares, irredeemable or perpetual debentures, irredeemable Government Promissory Notes provide long-term sources of capital market.

4. The long-term redeemable types of investment such as Government Promissory Notes, debentures, public deposits and redeemable preference shares also constitute capital market in India.

5. Underwriters, as the operators of supplying funds (e.g. merchant banking operators, issue houses who underwrite subscription to shares of new companies, etc.), take the responsibility of marketing of shares of various companies.

These underwriters including the different financial institutions and commercial banks are important constituents of capital market. Through their services, the bodies corporate become sure of their needs of capital.

6. The share markets or the stock exchanges as organised markets provide a form where buyers and sellers of securities meet and at the same time constitute a part of the capital market.

7. With an emphasis on industrial development and growth since 1956 and with the execution of the five-year plans, there has been a steady growth of the capital market in India.

8. The nest redeeming feature of the present capital market of India is the predominance of the State in the market. The big business houses are taking maximum advantage of the State-sponsored financial institutions.

Essay # 3. Factors Governing the Development of Capital Market :

1. Pool of reservoir savings for investment/capital formation/economic growth.

2. Presence of a network of financial and investment institutions for judicious use of savings and offer of specialised and essential services in the capital market.

There are three components of capital market:

1. New Issue Market-for new issues of securities.

2. Stock Exchange-for existing securities.

3. Financial Institutions-for offering medium term and long-term credit, and for underwriting of securities.

Essay # 4. Classification of Capital Market:

(i) Organized Capital Market:

The organized capital market is led by the Reserve Bank of India, banks, financial institutions and mutual funds. These institutions and all other intermediaries are regulated by SEBI and RBI. Government has its direct bearing on it through its economic and financial policies. As discussed above, the demand for long-term capital comes from the corporate sector and the government.

The sources of supply of funds are from individual investors, institutional agencies, government and international agencies. The supply from the foreign sector is in the form of mutual funds and NRI investments.

The organized capital market can be divided into the following two segments two segments:

(a) Primary Market:

Where new or fresh issues of capital are made by companies. There are three ways in which a company may raise capital-public issue, right issue and private placement. Public issues are widely traded in the stock exchanges. Such issue involves sale of securities to the general public.

In a right issue, further shares/debentures are offered to the existing shareholders. In a private placement, securities are sold privately to a selected group of investors in the form of collaboration agreements with other domestic/foreign companies. Thus, when a company wishes to raise capital it goes to the primary market by issuing equity as well as preference shares and debentures to public.

(b) Secondary Market:

Where outstanding securities can be resold to others through brokers and intermediaries. Stock exchanges constitute an organised market where securities issued by government, public bodies and joint stock companies are traded.

(ii) Unorganized Capital Market :

It consists of indigenous banks in towns, money lenders in rural areas, and lending pawn brokers. Other private leasing and finance companies, investment companies, chit funds form part of this system. They also mobilise savings and channelize them into investments. Though they are required to get themselves registered with the Register of Companies, RBI has no direct control over them

Essay # 5. Functions of Capital Market :

1. Mobilisation of financial resources on a nationwide scale.

2. Effective allocation of mobilised financial resources by directing the flow of funds to the points of highest yield and/or backward areas for balanced and diversified industrialisation so that optimum utilisation of available scarce financial resources can be secured. Thus, the long-cherished goals of our successful economic goals may be realised.

3. Securing of foreign capital and skill to fill up the deficit in the required resources for accelerated economic development. Foreign collaboration, in capital and know-how, is essential for developing the economy of our country.

Essay # 6. Securities in the Capital Market:

There are two major categories of securities in the capital market:

(a) Marketable securities include government securities, corporate securities, bonds, public sector units (PSU) and Unit Trust Mutual Funds. Public and institutions generally contribute towards such securities since these are issued by the government and companies in the public as well as private sector. Such securities are traded on the stock exchanges.

(b) Non-marketable securities consist of bank deposits, company deposits, loans and advances of banks and financial institutions, postal certificate and deposits. Such securities do not constitute an important part of the capital market due to their non-transferability.

Essay # 7. Recent Changes in Capital Market:

The changes that have occurred in the capital market of India in recent years may be outlined as follows:-

1. Government Policies and Measures:

The operational functioning of the stock exchanges in the country, one of the major constituents of this market, was modified in 1956 by the Securities Contracts (Regulation) Act. The Companies Act vas also thoroughly revised in the sane year and the Life Insurance Corporation of India was also established with a view to canalising the savings of the people towards investments.

Further, the Govt’s regulatory measures, which have effect on the capital market, extended to the Capital Issues (Exemption) Order 1969, Foreign Exchange Regulation Act 1973, and Monopolies & Restrictive Trade Practices Act, 1969, etc. The formation of the State Bank of India accelerated the financial assistance for rural development through the co-operatives via its integrated credit scheme.

2. Role of Promotional Institutions:

The establishment of promotional institutions like National Industrial Development Corporation (1954), State Industrial Development Corporations, Industrial Development Bank of India promoted and developed industries both in the public and private sectors with a programme of balanced regional growth.

All these institutions provided financial assistance at the initial stage in addition to the preparation of projects. The National small Industries Corporation (1955) and various State small Industries Corporations also provided financial help to the different small industries.

3. Role of Financial Institutions:

The Industrial Finance Corporation of India (1948), Industrial Development Bank of India (1964) established by the Central Government provided industrial finance to a number of large-scale industries both in the public and private sectors.

The Industrial Reconstruction Bank of India (1971) was established to revitalise the sick industries. In addition, State Financial Corporation’s (SPC’s), Industrial Credit and Investment Corporation of India (ICICI), a large number of Investment Trusts in the private sectors, the Unit Trust of India (1964) aid the Life Insurance Corporation of India (LIC) played a significant role in the field of industrial finance.

One noticeable feature is that all these institutions do underwriting functions also.

4. Role of Banking System:

The Indian banks are trading commercial banks and providing short-term financial accommodations. Recently, they are also providing term loans and doing underwriting functions. They often subscribe to the capital of financial institutions.

5. Role of Provident Funds, etc.:

The creation of provident funds for the employees of almost all establishments has become almost a compulsion by the Provident Fund Act 1952. The huge funds so collected go for investments according to the rules contained in the Act.

Again, huge funds available with the properties held under religious trusts also flow far investments far the Government Promissory Notes. Further, the general reserve funds and the redemption reserve funds, etc. from the companies also provide a big share to the capital market of our country.

6. Other Sources:

Different registered societies including co-operative societies also have their surplus funds for investments. Housing societies in urban areas are being built now-a-days and thereby huge investments are also involved in such buildings and constructions. The Life Insurance Corporation of India and various Investment Trusts in the private sectors are providing necessary capital in this project.

Difference between Capital Market and Money Market
Top 2 Types of Financial Market | Financial Management
Essay on Primary Market | India | Financial Management
Raising Capital by Industrial Concerns: 2 Sources | Capital | Industries

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Deepening capital markets in the Philippines

Across the Philippines and Asia’s other emerging economies, some $800 billion in investment opportunities go unfilled each year because capital markets are less reliable than issuers might like. Infrastructure is a particularly acute need for the Philippines, which has set an ambitious goal of increasing its infrastructure spending to 7 percent of GDP. In addition, if the cost of capital in the Philippines were lower and more stable, businesses would have an easier time raising money to fund new ventures and growth projects that could turbo-boost the country’s development and add to the incomes and wealth of its people.

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Although the situation is getting better, the Philippines has capital markets that are not yet as deep as those of several other Asian emerging economies (Exhibit 1). As our colleagues note in a recent report on the capital markets of emerging Asia , the Philippines has room to improve on several important indicators of capital market depth.

Equities, private and public bonds, and securitized products amount to 130 percent of GDP. This is comparable to China (136 percent) and India (118) but below Malaysia (275) and Thailand (184).
Issuances of private capital market products and government bonds each totaled 4 percent of GDP, on average, between 2013 and 2015—not much less than the 5-plus percent level in China, Malaysia, and Thailand, but well under the 9 percent threshold associated with the capital markets of developed economies.
The Philippines’ ratio of outstanding government and private debt to GDP is below the 1:1 level that is considered deep.
Companies pay higher costs of capital in the Philippines—more than 14 percent for equity, and between 2 and 3 percent for debt—than in several other Asian emerging economies.

The market for equities in the Philippines, its largest asset class, has rewarded equity investors with high risk-adjusted returns. The country’s Sharpe ratio, which measures returns per unit of risk, was 1.4 from 2008 to 2015. Most other markets in Asia had Sharpe ratios below 1 during that period (higher ratios indicate greater returns for a certain amount of risk). On the other hand, low liquidity, high trading costs, and problematic hedging mechanisms are significant issues to address in the equities market. Tapping into the equity markets could also be made easier. As it is, more than 40 documents are required to list shares on the main trading exchange.

On the debt side, the government bond market is deepening more quickly than the market for corporate bonds, although it lacks liquidity across much of the yield curve. Overall, more accurate and timely pricing information would help attract investors.

Policies and institutions to promote deeper capital markets

Policy makers in the Philippines recognize the country’s need for deeper capital markets, and the country’s Capital Market Development Plan Blueprint (PDF) calls for a variety of measures to strengthen markets and build the capacity of regulators. Two complementary courses of action could augment this.

The first is creating basic economic and social policies that will provide a foundation for longer-term market growth. We see four areas that warrant particular focus:

Expanding the investor base would help to expand the supply of capital. This base would ideally become both deep and broad, encompassing the full range of investors: buy-and-hold investors such as insurance companies and pension funds; buy-and-trade investors such as mutual fund managers; active investors, such as hedge funds, who help provide liquidity and improve pricing, but also need to be regulated appropriately; and private-market investors, who can provide capital to fund early stage businesses as well as turnarounds. Pulling in more investors will likely require a combination of marketing and education efforts.
Increasing the participation of issuers in the capital markets would help increase demand for capital. Various policies can help in this regard, such as encouraging the development of fast-growing small companies, accelerating the release of public-private partnership (PPP) initiatives that require fund raising by larger companies, and providing incentives for more private investment in infrastructure. Privatizing or listing state-owned enterprises, or at least mandating the use of debt markets by these entities, would also bring more issuers into the Philippines’ capital markets.
Charting a path toward sustainable integration with global markets should make it easier for foreign players to invest in the Philippines and for local investors to place money abroad, thereby diversifying sources of capital and types of investments. This might include marketing the Philippines as a destination for investments in industries other than business-process outsourcing, opening the Philippines to flows of inbound and outbound capital and trade, and aligning regulations with international standards.
Developing a deep, liquid government bond market would provide the benchmark pricing information that can help the corporate bond market to expand. To do this, governments need to issue debt on an ongoing basis, even when they run budget surpluses. In many cases, they also need to adopt different practices for issuing and managing debt: following a predictable issuance calendar, reopening “on the run” benchmarks (the most recently-issued debt securities of a given maturity), and establishing primary-dealer programs that balance dealers’ duties and privileges.

The second course of action available to policy makers is developing a market architecture: the institutions, regulations, and backbone systems, such as technology networks, that capital markets need to function well. This architecture consists of five important elements.

Independent, accountable regulators are vital to market development. Policy makers will need to determine what to regulate, so as not to stifle innovation, and how different regulatory bodies work together.
Cornerstone institutions, such as stock exchanges and credit rating agencies, play important roles in setting standards and focusing development. Establishing a mortgage regulator, for instance, could release capital that is now locked up in housing and help create a large securitization market. Policy makers will need to decide what institutions to create, and who should own and govern them.
Transparent rules and regulations, with predictable enforcement, help to decrease costs and risks for market participants. Policy makers must strike a balance between supervision and regulation and establish enforcement mechanisms that do not exceed the legal system’s capabilities.
Taxation policies have a strong influence on the development of capital markets: they can support, hamper, or distort them. In some markets, policy makers have gone beyond tax-neutral policies and provided tax incentives that encourage the development of specific activities and asset classes.
Using advanced technology in key parts of the financial infrastructure could be the biggest factor in the development of high-quality capital markets. Policy makers need to decide whether to permit the accelerated use of technology for certain market functions, such as blockchain technology for clearing and settlements. With the right policies in place, private players could fund and deploy most of the technologies to power effective markets.

Indeed, a coordinated, sustained effort by policy makers would likely do much more to deepen the Philippines’ capital markets than a series of ad hoc initiatives. Our discussions with officials outside the Philippines suggest that effective policy implementation is perhaps the most important factor for deepening capital markets—and one that can present challenges. Policy makers can start by setting long-term goals, then make a few simple but significant changes to get things moving in the right direction. Setting up effective regulatory institutions and reaching out to other stakeholders, such as private and public companies at home and abroad, encourages participation in the new system. Finally, policy makers can invest in educating and developing the talent that companies will need as their capital-markets activities increase.

Efficient allocation of funds is a key enabler of economic growth and social progress. Deepening capital markets in the Philippines should increase the flow of money to companies and public projects that can benefit society. Policy makers can do much to help deepen capital markets. By establishing pro-market policies, along with supportive rules and institutions, they can enable investors to put more of their money to work in the Philippines.

Nitin Jain is a Senior Knowledge Expert with McKinsey Knowledge Center's Guargaon office, Fumiaki Katsuki is a partner with McKinsey’s Tokyo office, and Kristine Romano is a partner with the Manila office.

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DAM Capital files draft papers with SEBI; Promoter, RBL Bank, others to divest stake in OFS

Dam capital ipo: dam capital advisors limited has filed its draft red herring prospectus for an ipo with sebi. the firm, offering various financial solutions, boasts the highest profit margin among peers for fiscal 2024 and a 12.1% market share in ipos and qips..

DAM Capital Advisors Limited has filed for an IPO, offering 3.2 crore equity shares. With a rapid growth rate and the best profit margin among peers, the company reported significant increases in total income and profit after tax from 2022 to 2024. Photo: iStock

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Essay on Moscow

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Moscow is the capital and largest city of Russia. It is the fourth largest city in the world, and is the first in size among all European cities.

Moscow was founded in 1147 by Yuri Dolgoruki, a prince of the region. The town lay on important land and water trade routes, and it grew and prospered. During the 1200’s, Tartar invaders from Asia conquered Moscow and other Russian lands.

Moscow grew rapidly during the 1600’s. The czars built palaces in the Kremlin, and nobles built mansions. New churches and monasteries arose, and industries developed. In 1703, Peter the Great began building a new capital at St. Petersburg. But Moscow remained an important center of culture, industry, and trade. In the fall of 1812, invading French Troops under Napoleon I entered Moscow without a struggle. Most of the people had left the city. Soon afterwards, a fire destroyed most of Moscow . After 35 days, the French troops left the city and began a retreat through the snow and cold.

In the 1917 revolution, the government fell to the Bolsheviks. They moved back to Moscow in 1918 capital.

Moscow lies in the north-central part of the European section of Russia. The Moscow River flows through the city. Moscow is built in the shape of a wheel. At the center of the wheel stands the Kremlin. This old fortress is the center of the Russian government. Inside its walls are beautiful cathedrals and palaces, as well as government buildings. Some of them date from the 1400’s.

Red Square lies just outside the Kremlin wall. It took its name in Russian from an old word meaning both beautiful and red. There, huge military parades celebrate special occasions. Thousands of people line up daily at the Lenin Mausoleum to view the preserved body of Lenin.

Opposite the Kremlin on Red Square is GUM, the largest department store. Saint Basil’s Church is also on Red Square. This 400-year-old building is part of the State Historical Museum. The Russia Hotel, one of the world’s largest hotels, faces the Kremlin near Red Square.

Muscovites are proud of their subway system, called the Metro. The city has more than 70 subway stations, which look like palace halls and are the fanciest in the world.

Muscovites have many facilities for recreation. Luzhniki, a huge sports area, includes Lenin Stadium, which can seat about 103,000 persons. Every year, about 7 million people go to Gorki Park, Moscow’s most popular amusement center.

The Bolshoi Theatre presents ballets that many people consider Russia’s highest artistic achievement. Young dancers are trained at the Bolshoi Theatre’s school. The nation’s largest symphony orchestra performs at the Tchaikovsky Conservatory. In addition, Moscow has a number of famous drama theatres, such as the Maly and Moscow Art theatres.

The city has about 150 museums and art galleries. Dazzling treasures that belonged to the czars are displayed in the Armory Museum in the Kremlin.

Moscow State University is the largest university in the country. It was established in 1755, and has more than 30,000 students. Moscow has more than a thousand elementary schools and high schools, and over 80 specialized institutes.

About 3,000 main and branch libraries operate throughout Moscow. The Lenin State Library, the largest library in Russia , has one of the largest collections of books and manuscripts in the world.

Moscow is also the most important industrial city in Russia. Its factories produce a wide variety of products, but chiefly automobiles, buses, and trucks. Other important products include chemical, electrical machinery, measuring instruments, steel, and textiles.

The city is the transportation center of Russia. Moscow has three major airports. The Moscow Canal links the city to the great Volga River.

Market performance

Equity & bond market.

The Equity and Bond Market is a liquidity center for operations with Russian securities and the main platform for Russian companies to raise capital. MOEX is a leading venue for issuance and trading of shares and depositary receipts of Russian and foreign shares; government, regional and corporate bonds; Bank of Russia bonds; sovereign and corporate Eurobonds; investment units of mutual funds (PIFs) and exchange-traded mutual funds (BPIFs); mortgage participation certificates; and shares of exchange-traded funds (ETFs).

Trading results

In 2020, total trading volumes on the Equity and Bond Market amounted to RUB 54.5 trln, which is 34% higher than in 2019. Trading volumes on the Equity Market increased by 93% to RUB 23.9 trln, reaching an all-time high. Bond Market trading volumes totaled RUB 30.6 trln, an 8.5% increase versus 2019.

In 2020, the volume of bond placements increased by 11.1% to RUB 19.5 trln, despite the volume of placements of overnight bonds declining over the last year (RUB 4.5 trln in 2020 vs RUB 5.9 trln in 2019) and the Bank of Russia bond issue volumes decreasing by 15% to RUB 5.1 trln. At the same time, Russian government bond (OFZ) placements increased by more than 2.5 times and corporate bond Corporate bond placements added 24.1%.

In 2020, 61 first-time bond issuers placed a total of RUB 515 bln, including debut placements of foreign government bonds of the Republic of Kazakhstan in the amount of RUB 39.5 bln.

The increase in trading volumes on the Equity Market was primarily driven by the record inflow of retail investors, the expansion of trading hours due to the introduction of the evening trading session, as well as a significant increase in the number of traded instruments, also thanks to foreign shares.

The massive issuance of bonds with a variable coupon rate (OFZ-PK) by Russian Ministry of Finance in 2020 resulted in a change in the of the government bond market structure: the share of OFZ-PK bonds increased from 18% to 34% (RUB 4.7 trln) of the total volume with constant coupon bonds.

In 2020, volumes of the primary corporate bond market (excluding overnight bonds) increased by 25% to RUB 3.97 trln. A record RUB 265.6 bln was placed in regional bonds, an increase by 2.4 times versus 2019.

In 2020, the MOEX Russia Index grew by 8%, the RTS Index decreased by 10.4%. By the end of 2020, the MOEX Russia Index reached an all-time high of 3,289.

	2018	2019	2020	Change 2020/2019 (%)
Equity Market trading volumes, RUB billion	10,830	12,443	23,905	92.1

	2018	2019	2020	Change 2020/2019 (%)
Bond Market trading volumes, RUB billion	29,841	28,219	30,617	8.5
Secondary trading, RUB billion	10,219	10,631	11,085	4.3
Sovereign bonds (OFZ)	6,538	6,781	7,534	11.1
Bank of Russia bonds (OBR)	537	411	138	-66.3
Sub-federal and municipal bonds	274	176	248	40.3
Corporate bonds	2,767	3,109	2,910	-6.4
Other (Eurobonds, bonds of MFOs and foreign countries)	102	155	256	64.9
Primary market and bond redemptions, RUB billion	19,622	17,588	19,532	11.1
Sovereign bonds (OFZ)	1,034	2,061	5,310	157.7
Bank of Russia bonds (OBR)	7,017	6,062	5,161	-14.9
Sub-federal and municipal bonds	86	112	266	137.3
Corporate bonds	2,850	3,483	4,322	24.1
One-day bonds	8,625	5,859	4,460	-23.9
Other (Eurobonds, bonds of MFOs and foreign countries)	10	14	15	11.1

Attracting retail investors

The number of individuals with brokerage accounts on Moscow Exchange increased by almost 5 million in 2020 and reached an all-time high of 8.8 million people. The number of opened individual investment accounts also doubled, reaching 3.45 million by the end of the year.

Retail investors accounted for 41% of stock trading volume in 2020, versus 34% in 2019. They are the most active participants of after-hours trading, generating 69% of total trading volume.

In 2020, the share of individuals in corporate bond placements, not including short-term bonds and large non-market issues, was 18.1% versus 12.7% in 2019; they accounted for 12.5% of secondary trading of corporate bonds, versus 10.6% in 2019. The total number of retail investors who traded bonds in 2020 increased to 817,000, which is twice as much as in 2019.

The activity of retail investors is growing at a high rate. In 2020, 2.3 million individuals traded on the Equity Market; more than 200,000 investors traded on a daily basis, which is three times more than in 2019.

In November, Moscow Exchange set price deviation limits for execution of market orders to mitigate risks for retail investors on the Equity & Bond Market. The mechanism curbs the impact of orders with substantial difference in the price from market prices on the overall pricing process.

Evening trading sessions

In June 2020, Moscow Exchange offered trading in shares, depositary receipts, ETFs and Russian-law ETFs from 19:00 to 23:50 (Moscow time). By the end of the year, 45 shares and depositary receipts on shares of Russian companies included in the MOEX Russia Index, 55 shares of foreign companies and 19 ETFs were admitted to after-hours trading.

To support liquidity during the evening trading session, Moscow Exchange introduced a market-making program aimed at maintaining quotes during the session.

In 2020, trading volumes of the evening trading session was RUB 777 bln, reaching 8% of total turnover of the Equity Market in December 2020.

Following the introduction of the evening trading session, the functionality of the online customer registration service was also expanded: trading members can register clients until 23:30 MSK, and clients are able to start trading in a matter of seconds after signing a brokerage service agreement.

International stocks

In August 2020, Moscow Exchange began trading in international stocks; in 2020, a total of 53 stocks of the most well-known and large US companies and two depositary receipts on shares of Chinese companies were admitted to trading.

In 2020, trading volumes in foreign stocks amounted to RUB 86 bln, more than 7,000 investors executed trades in the securities every day.

International stocks are traded both during the main and evening trading sessions.

Exchange-traded funds

In 2020, exchange-traded funds (ETFs) showed the greatest growth versus other instrument groups. Total trading volumes in ETFs increased six times to RUB 295 bln YoY, and the net asset value (NAV) of ETFs exceeded RUB 146 bln, increasing by RUB 107 bln in 2020.

A total of 55 ETFs are available on Moscow Exchange, of which three ETFs and 20 Russian-law ETFs were added in 2020. ETFs are popular among retail investors due to high diversification across investment vehicles: they provide an opportunity to invest in instruments of 50 countries worldwide.

In November 2020, ETFs and Russian-law ETFs were admitted to after-hours trading, which significantly expanded the investment opportunities for retail investors.

In December 2020, Moscow Exchange presented a mechanism for the placement of closed-end mutual funds via the Exchange, that allows to make the instrument more available and reduce costs of assets management companies associated for attracting investors.

On 22 June 2020, all corporate and regional bonds were transferred to the boards without full collateral required and with deferred settlement (settlement cycle T+1; Eurobonds: settlement cycle T+2). In November-December 2020, the average daily trading volume in all corporate and regional bonds increased by 45% to RUB 5.1 mln compared to April-May 2020, and spreads in liquid issues narrowed by 1.8 times over the same period.

To improve liquidity of the Bond Market, the Exchange is working on adjusting risk parameters with an option to post less than 100% collateral and lifting the ban on short selling, as well as adapting the risk assessment methodology for subordinated and mortgage bonds. At the end of 2020, 707 of the 2,227 listed bonds were traded without full collateral required and without the ban on short selling.

The Exchange decided to decrease bond placement fees by 50% for issues of up to RUB 1 bln and by RUB 100,000 for issues of over RUB 1 bln starting from 1 January 2021 to stimulate the development of the market for structured bonds issued under Russian law.

In September 2020, two open bilateral market-making programs were launched for local corporate bonds and Eurobonds to improve liquidity.

Expanding the range of instruments

In 2020, the range of Eurobonds available for trading on order books in small lots (~USD 1,000) was expanded. This product is aimed at increasing the availability of FX instruments for retail investors who seek to diversify their investment portfolios. Since April 2020, 26 issues of corporate, and 5 issues of sovereign Eurobonds (including 3 issues in Belarus) have been admitted to trading. In 2020, trading volumes in all Eurobonds increased by 60% to RUB 213 bln.

As a result of the software update in 2020, the OTC system offers now trading in commercial bonds and automated OTC reporting through the OTC monitor. As of the end of 2020, 97 companies were connected to the OTC system, the number of users reached 170, and 22 companies executed trades in the system.

To deepen the differentiation of customer access to non-government bonds depending on features and credit quality attributed to a bond, the Exchange created the Sector of High Investment Risk Companies for shares and bonds in June 2020.

Attracting SMEs

To encourage SMEs to tap the public markets, the Growth Sector has been functioning on MOEX since 2017. The Growth Sector is intended to attract funds to high-potential companies in the real sector of the economy, to expand the range of traded instruments on the financial market and to diversify investors’ allocations.

The Growth Sector is supported by the SME Corporation, MSP Bank, and the Ministry of Economic Development. The main partner of this initiative is the Bank of Russia.

In 2020, securities of 20 issuers were included in the Growth Sector, including 12 bonds of SME issuers. The total Growth Sector bond issuance was RUB 20.8 bln at the end of 2020, including bond issues by SME issuers of RUB 6.8 bln.

As part of the implementation of the SME national project, SME issuers have access to financial support instruments. In 2020, the Ministry of Economic Development of the Russian Federation provided subsidies on bond coupon rates in the amount of RUB 124.2 mln for 18 transactions, and SME Bank provided anchor investments for a total amount of RUB 1,280 bln for 10 transactions.

Innovation and Investment Market

The Innovation and Investment Market (IIM) has successfully operated on MOEX since 2009. The IIM was created to promote investment in the innovation sector of the Russian economy. One of the support measures for the sector is tax incentives for investors: investment income from securities of issuers with a market capitalization of up to RUB 25 bln is not taxable, provided that the investor holds them for at least one year.

In 2020, nine securities were placed on the IIM Sector: seven bonds of five issuers. In 2020, total trading volumes in the IIM Sector grew 385% YoY to RUB 280 bln.

In 2020, MOEX continued working with development institutions and private equity funds to stimulate pre-IPO financing for potential issuers: in particular, the IIM Sector began trading in VTB Capital’s closed-end mutual fund, that covers four companies from high-tech sectors of the economy which are candidates for an IPO in the IIM Sector.

Listing of securities

MOEX is constantly working to increase the quality of securities included in its quotation lists by improving issuing procedures and encouraging issuers to adhere to best practices of corporate governance. This work is aimed at increasing the transparency and attractiveness of the Russian stock market and protecting the interests of retail and institutional investors.

As part of the intensified process of informing investors about the quality of traded securities, 97 securities of 57 issuers were included in the Sector of High Investment Risk Companies in 2020.

The Sustainability Sector, intended for securities placed with the aim of raising funds or refinancing environmental or other social projects, welcomed four issuers s compliant with the green/social financing principles of the International Capital Market Association (ICMA), Climate Bonds Initiative (CBI) or Social Bond Principles (SBP).

The Exchange is actively working with small- and medium-sized enterprises (SMEs), supporting the development of the SME national project. The Exchange will maintain preferential tariffs for the issuance of bonds by SME issuers until the end of 2021.

In 2020, a tariff model was developed for the inclusion and placement of structured bonds and foreign bonds with payments (income and/or the nominal value) depending on whether one or more predetermined events occur.

As of the end of 2020, 2,734 securities of 706 issuers were admitted to trading, including 264 shares of 213 issuers and 1,816 bonds of 350 issuers. The Exchange’s quotation lists include 1,033 securities of 231 issuers; the Level 1 List includes 658 securities of 146 issuers and the Level 2 List includes 375 securities of 107 issuers.

In 2020, Sovcomflot, Samolet and Ozon carried out their initial public offerings (IPO) at Moscow Exchange. Foreign securities of seven new issuers such as Etalon Group, Petropavlovsk PLC, Globaltrans, MD Medical Group Investments PLC, O`KEY Group S.A., Mail.ru Group and HeadHunter Group were also listed.

DERIVATIVES MARKET

Moscow Exchange’s Derivatives Market is Russia’s largest and one of the world’s leading venues for derivatives trading. The market brings together deep liquidity, a broad product offering, performance guarantees from the Central Counterparty and state-of-the-art technologies for the trading of futures and options. Derivatives Market participants can trade derivative financial instruments on indices, Russian and foreign shares, Russian government bonds (OFZ), foreign currencies, interest rates and commodities (oil, precious metals and industrial metals, agricultural products).

2020 was a year of active inflow of new clients to the Derivatives Market, marking an increase in their activity. As of the end of 2020, the number of active clients increased by 42% YoY to more than 93,000. The number of accounts registered on the market increased 2.2 times to 4.3 million.

Trading volumes

In 2020, total trading volumes on the Derivatives Market amounted to RUB 129.9 trln, or 2,067 mln contracts (versus RUB 82.4 trln or 1,455 contracts in 2019), including futures trading volumes of RUB 124.5 trln and options trading volumes of RUB 5.3 trln.

	2018	2019	2020	Change 2020/2019
Derivatives Market trading volumes, RUB billion	89,263	82,370	129,864	57.7%
Futures	82,397	77,376	124,516	60.9%
Options	6,866	4,994	5,348	7.1%
Futures, RUB billion	82,397	77,376	124,516	60.9%
FX	37,868	28,996	63,369	118.5%
Interest rates	10	12	5	-57.0%
Single stock	4,439	4,345	3,957	-8.9%
Indices	19,161	16,504	29,810	80.6%
Commodities	20,918	27,519	27,375	-0.5%
Options, RUB billion	6,866	4,994	5,348	7.1%
FX	2,047	1,478	1,654	11.9%
Single stock	25	51	30	-40.4%
Indices	4,438	3,107	3,343	7.6%
Commodities	356	358	321	-10.3%

In 2020, the average trading volume of the Derivatives Market increased by 59% YoY. FX contracts grew most rapidly with the average daily trading volume increasing 115% YoY on the back of high ruble volatility. Index and single stock contracts also showed strong performance (+56% YoY). Trading volumes in the most liquid contracts such as the USD/RUB FX futures and RTS Index futures increased by 124% and 89%, respectively.

Moscow Exchange was one of the exchanges globally by oil futures trading volume, according to the Futures Industry Association (FIA). According to the FIA, the MOEX Brent oil futures contract maintained the first position among energy derivatives worldwide for the third year in a row. The MOEX USD/RUB FX futures contract was another popular instrument ranked as No.2 in the international rating for FX derivatives.

New product offering

In 2020, the Derivatives Market continued to actively expand the line of derivatives on various types of assets with the aim of providing additional trading and hedging opportunities to professional participants and portfolio managers as well as retail investors. Today, 78 futures and 39 options are available to the Derivatives Market participants.

In February, trading in natural gas futures was successfully launched on the market. In just a year, the contract successfully gained momentum and became one of the most liquid contracts in the commodity section with an average daily turnover of RUB 495 mln. In early 2021, MOEX launched options on the futures.

In 2020, Moscow Exchange significantly expanded its range of equity derivatives. It launched futures on shares of Yandex, Polymetal and Inter RAO and on global depositary receipts of Tinkoff, X5 and Mail.ru. Weekly options on futures on shares of Gazprom and Sberbank were added to trading.

At the end of the year, a large-scale project was implemented jointly with the Commodities Market, which rolled out a deliverable wheat futures contract designed to become the first Russian wheat price benchmark.

Technological development

Among technological projects, the Exchange implemented synthetic matching of calendar spreads, and also made a big step in the development of block trading by launching the RFS service (Request for Stream) at the beginning of the year and providing clients with the opportunity to place iceberg orders from September.

Synthetic matching of calendar spreads allows searching counter interest in futures that form a calendar spread, not only inside its order book, but also in the order books of related instruments. Since the launch, trading volumes in calendar spreads have grown more than 15 times on average; trading volumes amounted to about 588,000 contracts in the first eight months of 2020 and 4,573,000 in the last four months of 2020.

The RFS service allows trading large blocks without affecting the market price and on more favorable terms compared to the order book. The service works through a distinct anonymous auction in which the liquidity taker submits an order indicating its volume and optionally, type (sell/purchase). Liquidity makers provide quotes at which they are ready to make a transaction for that volume, and the best option is transmitted to the taker. As a result, the non-negotiated trade with the central counterparty is executed.

Iceberg orders are also designed to facilitate large block trading. They allow making only part of an order visible to the market in order to mitigate the impact of larger than market orders on the market price. At order entry, clients specified the total amount of the order and its fixed visible portion. When the visible portion is fully filled at the market price, the next portion becomes visible.

In 2020, MOEX offered an option to execute trades in derivatives at negative prices for certain underlying assets.

MOEX plans to roll out even more services and instruments in 2021, including the introduction of an morning trading session in March 2021, which will start at 7 am MSK.

2020 was marked by high volatility, and one of the main objectives of the Exchange was to maintain liquidity during periods of sharp market fluctuations. MOEX automated and implemented the process of changing the terms of market maker obligations during periods of increased volatility for a number of futures contracts.

The market making schemes for options were amended to optimize the formula for calculating the spread to be maintained by market makers. The formula now includes time to expiration, that allows setting spreads closer to the market when market makers start performing their obligations for the instrument.

In addition, in 2020, the Exchange launched programs to maintain liquidity for new instruments of the equity, commodity, and money sections.

Moscow Exchange is the oldest regulated trading venue in Russia, and has offered FX trading since 1992. It is a liquidity center for operations with the Russian ruble and a crucial element of the Russian financial system. The Bank of Russia relies on the FX Market to implement monetary policy and sets the official USD/RUB rate using results of trading on the FX Market.

In 2020, the share of MOEX’s FX Market in the total volume of FX operations made by Russian banks across all currency pairs increased on average from 44% to 47%; MOEX’s share increased from 57% to 58% in USD/RUB trading and from 64% to 68% in EUR/RUB trading.

	2018	2019	2020	Change 2020/2019
FX Market trading volumes, RUB billion	348,368	308,274	328,946	6.7%
Spot	86,682	67,370	96,942	43.9%
Swap and forwards	261,686	240,904	232,003	-3.7%
Currency pairs, RUB billion
	277,751	242,627	266,616	9.9%
	59,243	51,571	50,071	-2.9%
	10,084	13,349	10,880	-18.5%
	1,081	551	986	79.0%
Other	209	176	393	122.8%

Trading volumes in the FX Market in 2020 accounted for RUB 329 trln, up 7% versus 2019. Spot trading volumes grew by 44% to RUB 97 trln, while swap trading volumes decreased by 4% to RUB 232 trln.

Problems in the global economy and financial markets associated with the spread of the pandemic, the fall in oil prices and the elections in the U.S. have caused the growth of volatility and fueled the interest of counterparties in conversion operations. On the contrary, there was a decline in swap transactions due to a decrease in ruble interest rates. As a result, the share of spot transactions in the FX market increased over the year from 22% to 29.5%, while the share of swap transactions decreased from 78% to 70.5%.

In 2020, the structure of trading by currency pair changed insignificantly: the share of trading accounted for by the USD/RUB pair increased from 79% to 81%, and the share of trading accounted for by the EUR/RUB pair decreased from 17% to 15%. All other currency pairs remained flat YoY at 4%.

Expansion of the client base

Access for corporations.

Since the end of 2020, management companies of investment funds, mutual investment funds (MIF) and non-state pension funds (NPF) have also received the opportunity to operate on the FX Market, along with professional participants, corporations and insurance companies. At the end of 2020, 43 corporations, including insurance companies, connected to the FX Market. Their aggregate trading volume increased in 2020 by 64% to RUB 1.8 trln (RUB 1.1 trln in 2019).

In 2020, the Federal Treasury continued to trade overnight currency swaps (meaning the provision of rubles secured by US dollars) on the FX Market.

Attracting private clients

In 2020, lower interest rates on deposits drove individuals’ interest in investing in financial assets, which became an important driver of growth on the FX Market.

The number of active individual clients grew almost five times to 730,000.

In 2020, volume of conversion operations by individuals more than doubled, exceeding RUB 24 trln, while the share of individuals in spot transactions increased on average from 8% to 12%.

In the context of competition with numerous OTC electronic platforms, the main emphasis in the development of the exchange market is placed on technological and organizational innovations that provide a comprehensive service offering to all categories of customers: new product solutions, expanded trading hours, differentiated tariffs, international cooperation, links with international platforms and much more.

OTC services development and technology initiatives

One of the main principles of the FX Market’s development strategy is to provide various services for order execution across a range of volumes and client types, and for clearing of these transactions.

At the end of March, hours of trading were expanded for such boards as “Links with foreign liquidity providers” and “Request for Stream” (RFS) with the trading now starting at 9:30 am MSK. In 2020, volume of RFS transactions exceeded RUB 45 bln.

The mode of providing large-block liquidity for the ‘Euro - US dollar’ currency pair has been added to the “Links with foreign liquidity providers” service. In the “OTC market large transactions” mode for the EUR / USD_SPT instrument, it became possible to submit large orders in full amount on fixed bends - 1, 2, 5 and 10 million euros.

The “Links with foreign liquidity providers” service was streamlined to include a mode with large-block liquidity in EUR/USD. The “Large OTC Transactions” mode now offers Full Amount Block Orders for EUR/USD_SPT of fixed sizes of 1, 2, 5 or 10 million euros.

Obtaining a flow of quotations from major Western liquidity providers strengthened MOEX’s positions in the currency pairs Euro – US dollar, Pound sterling – US dollar, US dollar – Chinese yuan, US dollar – Turkish lira and US dollar – Japanese yen. In 2020, total trading volumes in G10 currencies doubled YoY and exceeded RUB 1.1 trln.

In 2020, a major step was taken in the development of clearing services with an option for OTC trades executed by MOEX clearing members on OTC platforms to be cleared by the central counterparty. The service allows mitigating credit and settlement risks and performing settlement netting and cross-margining across on-exchange and OTC trades.

In 2020, Moscow Exchange acquired a stake in the leading OTC aggregator NTPro with the aim to participate in the development of the OTC FX market in addition to the on-exchange market and offer customized services to its clients.

The last year’s launch of the new SpeedBump technology with a random program delay of orders and asymmetrical maker/taker fees, which allows liquidity takers to conclude transactions with zero trading fee, made it possible to gain large-block liquidity from non-banking providers and major Russian banks. In 2020, the “Large Spot Transactions” mode was increasingly popular among participants. Trading volume increased by more than five times YoY to RUB 2 trln.

With the TWAP (Time Weighted Average Price) algorithm rolled out, participants now can sell the amount evenly over the pre-determined time period. In December 2020, the average daily trading volume made using TWAP was USD 100 mln.

The functionality for additional checks of client SMA orders was implemented, which allows more effective management of client risks.

In August 2020, Moscow Exchange authorised the use of its FX fixings by CME Group’s EBS eFix Matching Service platform. This promotes the MOEX FX fixings among a wider range of international banks and their clients on the global market and strengthen their status as the main global FX benchmarks for the Russian ruble.

In the context of the pandemic and transition to remote working, the Exchange made efforts to organize a convenient trading schedule for its clients. In late September, trading hours for TOD instruments and overnight swaps in Chinese Yuan, Swiss Franc, Turkish Lira, Belarusian Ruble and Kazakhstan Tenge were extended to 12:00 noon (Moscow time) in response to demand from participants, primarily those from north-east regions and Asia.

Attracting international investors

As of the end of 2020, more than 17,000 non-resident clients from 130 countries of the world were registered on MOEX’s FX Market. In December 2020, the number of active non-resident clients doubled YoY and exceeded 1,870.

In 2020, the share of non-residents in spot turnover increased on average from 38% to 43%.

In 2020, turnover of non-residents’ transactions under the SMA (Sponsored Market Access) and ICM (International Clearing Membership) schemes almost doubled and totaled RUB 35 trln.

As part of a strategic partnership agreement with Moscow Exchange, Kazakhstan Stock Exchange (KASE) introduced a new trading and clearing platform on its FX market, which was developed based on Moscow Exchange technologies. In the future, the exchanges plan to use the benefits of the unified trading technologies to aggregate liquidity in KZT/RUB.

Moscow Exchange continues developing the integrated FX Market of the Eurasian Economic Union (EAEU). In 2020, within the EAEU Integrated FX Market project, access to the FX Market was provided to Belinvestbank (Belarus). Thus, as at the end of 2020, direct access to MOEX’s FX Market was provided to 19 banks from Eurasian Economic Union countries, including two international financial institutions: the Interstate Bank and the Eurasian Development Bank (EDB). In 2020, trading volumes generated by participants of the integrated FX Market doubled to RUB 2.7 trln.

MONEY MARKET

Moscow Exchange’s Money Market is one of the most important segments of the Russian financial market through which market participants carry out cash liquidity management. The Bank of Russia implements monetary policy via the Money Market, and the Federal Treasury deposits funds of the federal budget and, from 2021, funds of the Single Treasury Account.

The key segment of the Money Market is repo transactions with the Central Counterparty (CCP), performed by NCC, which guarantees fulfilment of obligations before all participants. Repo with the CCP in general collateral certificates (GCC) is also available and is now the most widely traded segment on the Money Market.

In 2020, total Money Market trading volumes amounted to RUB 426.8 trln, up 23.2% YoY.

Repo trading volumes for 2020 totalled RUB 379.1 trln, accounting for 89% of total Money Market volumes; trading volumes of deposit and credit transactions for 2020 totalled RUB 47.6 trln.

The year-on-year increase in total market trading volumes was the result of a 20.7% increase (to RUB 243.8 trln) in the volume of repo transactions with the CCP. The average daily open position in repos with the CCP in 2020 increased by 28% - to RUB 3.65 trln.

GCC repo continues to be the most-fastest growing repo product in 2020: trading volumes increased by 38.9% YoY to RUB 75.1 trln, and the average daily open position added 30% to RUB 950 bln.

In April 2020, Federal Treasury funds began to be deposited with the CCP via auctions. The volume of deposited funds in 2020 totalled RUB 6.4 trln.

	2018	2019	2020	Change 2020/2019
Money Market trading volumes, RUB billion	364,216	346,347	426,781	23.2%
On-exchange repo, RUB billion	309,913	292,813	379,135	29.5%
Direct repo with the Bank of Russia	829	274	2,827	933.1%
Interdealer repo	49,663	36,441	35,125	-3.6%
CCP-cleared repo	259,421	256,075	318,876	24.5%
incl. GCC repo	46,888	54,054	75,069	38.9%
Repo with the Federal Treasury		23	22,307	98,604.3%
Credit market, RUB billion	54,303	53,534	47,647	-11.0%

In July 2020, the RUSFAR (Russian Secured Funding Average Rate) Money Market rate was recognized by the Bank of Russia as compliant with the requirements for financial indicators based on the Principles for Financial Benchmarks of the International Organization of Securities Commissions (“IOSCO”). The Bank of Russia has accredited RUSFAR rates across all terms: overnight, one week, two weeks, one month and three months for RUB and overnight for USD.

Direct repo with floating rates was implemented, which allowed the Bank of Russia to lend banks at a rate tied to the key rate of the Bank of Russia.

In order to provide participants of the Money Market with a more flexible approach to liquidity management, MOEX implemented the following projects in 2020:

a new order type, an iceberg order, was introduced to allow participants to place/raise large amounts of funds at the best rates via repo with the CCP by making only part of the order amount visible to the market;
In July, operations of the Federal Treasury were further enhanced by the option to place foreign currency via repo transactions executed in the exchange terminal with collateral management and settlements at NSD. Transaction volumes in 2020 amounted to RUB 30.7 bln.
In December 2020, the Credit Market, a new segment within MOEX’s Money Market, was created. Both repo and CCP deposit markets participants can be admitted to the Credit Market. At the same time, only banks can place funds, and all participants can raise funds without restrictions. Only negotiated transactions without the CCP involved are available; the transactions are executed in RUB or foreign currency (USD or EUR) for any term up to three years.

Attracting new categories of participants

MOEX continued to expand direct access to the Money Market for Russian legal entities that are neither credit institutions nor professional securities market participants.

A number of innovations were implemented that facilitated corporate clients’ operations on the Money Market:

iceberg orders were introduced to allow placing large amounts of funds at the best rates;
an optional service was launched to allow consolidation of numerous small transactions into one deposit and thus relieve a company’s accounting systems;
an option to post collateral in securities was provided.

In 2020, 22 companies were provided with access to the deposit market with the CCP, including manufacturers, insurance, asset management companies and non-government pension funds. Their total number reached 130 and total trading volume was RUB 20.7 trln.

COMMODITIES MARKETS

MOEX promotes commodities trading through two key commodities markets: precious metals and agricultural. Precious metals are traded on the MOEX FX Market platform, while trading in agricultural products is operated by the National Mercantile Exchange (NAMEX), part of Moscow Exchange Group.

On-exchange trading in agricultural products

Spot trading in sugar was launched in 2020. The project has implemented a trading model with direct admission of buyers and sellers (without a broker or central counterparty). Sellers on the sugar market are plants or holding companies of producers with or without constant collateral of RUB 1 million. Any companies other than individual entrepreneurs are eligible to act as a buyer. Delivery basis are plants that have started production in the current season. Trading is run in the form of a bilateral anonymous auction. NSD clears and settles the sale and purchase contracts executed on the exchange. The project is supported by the Exchange Committee of the Federal Antimonopoly Service (FAS) of Russia, Soyuzrossakhar, and representatives of the industry community.

Since 2017, NAMEX has also been holding trading in sugar forward contracts.

In 2020, trading volumes on the sugar market was RUB 3.95 bln, of which RUB 3.93 bln were traded on the Derivatives Market (2019: RUB 3.96 bln) and RUB 20.1 mln on the spot market.

Since 2002, NAMEX has been the authorised exchange of the Russian Ministry of Agriculture for state commodity and procurement interventions on the grain market. In 2020, grain sales from the government intervention fund on NAMEX totaled 1.78 mln tons, or RUB 21.43 bln (2019: 970,200 tons, or RUB 10.3 bln).

In total since 2002, 34.48 mln tons of grain have been sold under government interventions for a total amount of RUB 211.83 bln, and the total number of trading participants exceeded 9,500 producers, processors and exporters of grain.

In December 2020, MOEX Derivatives Market introduced a deliverable wheat futures contract with delivery performed on the NAMEX spot market. Trades are cleared by National Settlement Depository.

Precious Metals Market

MOEX has offered on-exchange trading in precious metals (gold and silver) since 2013. Gold and silver are traded on the FX Market platform using a unified system of margining and risk management. NCC acts as the Central Counterparty and provides clearing and settlement services on the market. Metals are delivered to clearing members’ precious metals accounts opened with CCP NCC. Post-trade services include dealing with bullion at NCC’s depository, and an option to use precious metals held on market participants’ accounts as collateral.

In 2020, total turnover on MOEX’s Precious Metals Market increased by 50% to RUB 52.6 bln.

Since November 2020, Russia’s largest brokerage companies have started providing individuals with access to the Precious Metals Market with an option for individuals to trade gold and silver on their own.

In 2020, the number of participants of the Precious Metals Market increased from 56 to 63, of which 47 were credit institutions, 14 brokerage and investment companies and 3 mining companies (of which two entered the market in 2020).

	2018	2019	2020	Change 2020/2019
Precious Metals Market trading volumes, RUB billion	102	35	53	48.3%
Grain and Sugar Market trading volumes, RUB billion	50	50	25	-49.6%
Grain	46	46	21	-53.8%
Sugar	3.87	3.96	3.97	0.3%

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COMMENTS

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