Capital Market — Complete Banking Awareness Notes
Detailed notes on Capital Market, Primary Market, Secondary Market, Equity, Shares, Bonds, Debentures, IPO, FPO, Rights Issue, Stock Exchanges, SEBI, Mutual Funds, Derivatives and related concepts.
Table of Contents
- 1. Meaning of Capital Market
- 2. Importance of Capital Market
- 3. Features
- 4. Structure of Capital Market
- 5. Primary Market
- 6. Secondary Market
- 7. Capital Market Instruments
- 8. Equity Shares
- 9. Preference Shares
- 10. Bonds
- 11. Debentures
- 12. IPO
- 13. FPO
- 14. Rights Issue
- 15. Bonus Issue
- 16. QIP
- 17. Offer for Sale
- 18. Private Placement
- 19. Stock Exchanges
- 20. NSE
- 21. BSE
- 22. SEBI
- 23. Market Intermediaries
- 24. Demat Account
- 25. Trading Account
- 26. Depositories
- 27. Clearing and Settlement
- 28. Mutual Funds
- 29. REITs and InvITs
- 30. Derivatives
- 31. Futures
- 32. Options
- 33. Market Indices
- 34. Bull and Bear Market
- 35. Market Capitalisation
- 36. Dividend
- 37. Yield and Return
- 38. Listing of Securities
- 39. Delisting
- 40. Capital Market vs Money Market
- 41. Primary vs Secondary Market
- 42. Equity vs Debt
- 43. Regulation of Capital Market
- 44. Investor Protection
- 45. Capital Market Risks
- 46. Important Numerical Concepts
- 47. Common Exam Traps
- 48. Rapid Revision Facts
- 49. Frequently Asked Questions
- 50. SEO Keyword Map
1. What is Capital Market?
The Capital Market is a financial market where long-term funds are raised and invested. Companies, governments and other eligible entities can raise funds through various securities. Investors provide capital with the expectation of earning returns.
Capital markets are important because they connect entities that need long-term finance with investors who have surplus funds and are willing to invest for returns.
Simple Example
Suppose a company wants ₹1,000 crore to build a new manufacturing plant. It may raise money by issuing shares or bonds. Investors purchase those securities. The company receives funds, while investors receive ownership rights, interest, dividends or capital appreciation depending on the security.
2. Importance of Capital Market
- Mobilises savings from investors.
- Provides long-term finance to companies.
- Supports infrastructure and economic development.
- Provides investment opportunities to individuals and institutions.
- Helps companies raise equity and debt capital.
- Provides liquidity through secondary-market trading.
- Helps in price discovery of securities.
- Encourages efficient allocation of capital.
- Supports entrepreneurship and business expansion.
- Creates an organised mechanism for buying and selling securities.
3. Major Features of Capital Market
Long-Term Finance
Capital markets mainly facilitate long-term financing and investment.
Wide Range of Securities
Shares, bonds, debentures, units of investment vehicles and derivatives are associated with capital-market activity.
Liquidity
Secondary markets allow investors to sell securities before their intended investment period ends.
Price Discovery
Market demand and supply help determine the market price of traded securities.
4. Structure of Capital Market
The capital market can broadly be divided into the Primary Market and Secondary Market.
| Market | Main Function | Who Receives the Money? |
|---|---|---|
| Primary Market | Issue of new securities | Issuing company/entity |
| Secondary Market | Trading of already-issued securities | Usually the selling investor |
5. Primary Market
The Primary Market is the market where new securities are issued for the first time or additional securities are issued by an existing issuer.
The issuer receives funds from investors, subject to the structure of the particular issue.
Examples
- Initial Public Offering (IPO)
- Follow-on Public Offer (FPO)
- Rights Issue
- Qualified Institutional Placement (QIP)
- Private Placement
- Offer for Sale (OFS), depending on the transaction structure
6. Secondary Market
The Secondary Market is where existing securities are bought and sold among investors.
The company normally does not receive the trading money from a normal secondary-market transaction. Instead, the buyer pays the seller through the market's settlement mechanism.
Functions
- Provides liquidity to investors.
- Provides continuous price discovery.
- Allows investors to enter or exit investments.
- Creates a market price for listed securities.
- Supports confidence in the primary market.
7. Major Capital Market Instruments
| Instrument | Basic Nature | Typical Return |
|---|---|---|
| Equity Shares | Ownership | Dividend + Capital Appreciation |
| Preference Shares | Preference capital | Preferential dividend |
| Bonds | Debt | Interest/Coupon + Principal repayment |
| Debentures | Debt instrument | Interest |
| Mutual Fund Units | Collective investment | Market-linked return |
| Derivatives | Value derived from underlying asset | Depends on price movement/contract |
8. Equity Shares
Equity shares represent ownership in a company. Equity shareholders generally have voting rights and participate in the residual profits of the company.
Important Characteristics
- Represent ownership in the company.
- Usually carry voting rights.
- Dividend is not guaranteed.
- Dividend depends on profits and company decisions.
- Shareholders can benefit from capital appreciation.
- Equity shareholders generally bear higher investment risk than debt holders.
- They are residual claimants after prior claims are met.
9. Preference Shares
Preference shares generally provide shareholders preferential rights regarding payment of dividend and repayment of capital compared with equity shareholders.
Depending on the type of preference share, dividend may be cumulative, non-cumulative, participating, non-participating, redeemable or convertible.
10. Bonds
A Bond is a debt instrument through which the issuer borrows money from investors.
The issuer generally promises to pay interest according to the terms of the bond and repay principal according to the maturity conditions.
Important Bond Terms
- Face Value: Nominal value of the bond.
- Coupon: Stated interest rate/payment on the bond.
- Maturity: Date when principal becomes due.
- Yield: Return associated with the bond based on price and cash flows.
- Issuer: Entity borrowing money through the bond.
11. Debentures
A debenture is a debt instrument used by a company to raise funds. Depending on its terms, a debenture may be secured or unsecured and may be convertible or non-convertible.
| Type | Meaning |
|---|---|
| Convertible Debenture | Can be converted into equity according to the terms. |
| Non-Convertible Debenture (NCD) | Does not convert into equity under its terms. |
| Secured Debenture | Backed by specified security/charge. |
| Unsecured Debenture | Not backed by specific collateral. |
12. Initial Public Offering (IPO)
IPO stands for Initial Public Offering. It is the process through which a company offers its shares to the public for the first time under the applicable regulatory framework.
Why Companies Use IPOs
- Raise capital for expansion.
- Finance new projects.
- Repay certain liabilities.
- Provide an exit opportunity to existing investors in certain structures.
- Obtain listing and access to public markets.
13. Follow-on Public Offer (FPO)
FPO stands for Follow-on Public Offer. It is a public offering of shares by a company that is already publicly listed, subject to applicable regulations.
| IPO | FPO |
|---|---|
| Initial public offering | Follow-on public offering |
| Associated with first public offering | Additional public offering by an already listed company |
14. Rights Issue
A Rights Issue gives existing eligible shareholders an opportunity to purchase additional shares, usually in proportion to their existing holdings, according to the issue terms.
The purpose is generally to raise additional capital while giving existing shareholders a preferential opportunity to subscribe.
15. Bonus Issue
A Bonus Issue involves issuing additional shares to existing shareholders without charging an issue price, by capitalising eligible reserves or other permitted sources according to applicable law.
16. Qualified Institutional Placement (QIP)
QIP stands for Qualified Institutional Placement. It is a capital-raising mechanism through which an eligible listed company can issue securities to qualified institutional buyers, subject to applicable regulations.
It is designed primarily for raising funds from eligible institutional investors without using a conventional public offering route.
17. Offer for Sale (OFS)
OFS stands for Offer for Sale. It provides a mechanism for existing shareholders/promoters, subject to applicable rules, to sell shares through a recognised stock exchange mechanism.
18. Private Placement
Private placement means raising funds by offering securities to a selected group of investors rather than making a general public offer.
It is commonly used by companies and other eligible issuers to raise capital from identified investors subject to applicable laws and regulations.
19. Stock Exchange
A Stock Exchange is an organised marketplace where eligible securities can be traded according to established rules, regulations and trading systems.
Major Functions
- Provides a trading platform.
- Facilitates price discovery.
- Provides liquidity.
- Supports transparent trading.
- Facilitates orderly settlement.
- Provides market information.
20. National Stock Exchange of India (NSE)
NSE stands for National Stock Exchange of India. It is one of India's major stock exchanges.
Important Points
- NSE provides electronic trading infrastructure.
- Its major benchmark equity index is the Nifty 50.
- NSE facilitates trading in equity and other permitted market segments.
- It is an important part of India's capital-market infrastructure.
21. Bombay Stock Exchange (BSE)
BSE stands for Bombay Stock Exchange. It is one of India's major stock exchanges and one of the world's oldest stock exchanges.
Important Index
BSE's major benchmark equity index is the SENSEX, commonly associated with a basket of major companies listed on BSE.
22. Securities and Exchange Board of India (SEBI)
SEBI stands for Securities and Exchange Board of India. It is the principal regulator of India's securities market.
Major Objectives
- Protect investors.
- Promote development of the securities market.
- Regulate the securities market.
- Improve transparency and market integrity.
- Regulate market intermediaries under applicable laws.
- Take action against market manipulation and prohibited practices.
23. Major Capital Market Intermediaries
| Intermediary | Main Role |
|---|---|
| Stock Broker | Facilitates buying and selling of securities. |
| Merchant Banker | Provides issue-management and related services. |
| Registrar and Transfer Agent | Handles investor records and issue/transfer-related functions. |
| Depository | Holds securities electronically. |
| Credit Rating Agency | Provides credit assessment/rating information for eligible instruments. |
| Mutual Fund | Collects investments and invests according to its scheme objectives. |
24. Demat Account
A Demat Account is used to hold securities in electronic form.
"Demat" is short for Dematerialised. Physical securities can be converted into electronic holdings through the applicable dematerialisation process.
25. Trading Account
A trading account is used to place buy and sell orders in securities through a broker or authorised platform.
| Account | Main Purpose |
|---|---|
| Bank Account | Money transactions |
| Trading Account | Buying and selling securities |
| Demat Account | Holding securities electronically |
26. Depositories in India
A depository holds securities in electronic form and provides depository-related services through its participants.
Major Indian Depositories
- NSDL — National Securities Depository Limited
- CDSL — Central Depository Services (India) Limited
27. Clearing and Settlement
After a trade is executed, the transaction must be cleared and settled. Clearing determines obligations, while settlement involves the actual exchange of securities and funds according to the applicable cycle.
Basic Process
- Investor places order.
- Order is matched.
- Trade is executed.
- Clearing determines obligations.
- Funds and securities are delivered.
- Settlement is completed.
28. Mutual Funds
A mutual fund pools money from investors and invests the pooled money according to the objectives of the particular scheme.
Important Terms
- AMC: Asset Management Company.
- NAV: Net Asset Value.
- SIP: Systematic Investment Plan.
- Expense Ratio: Expenses charged in relation to fund management, subject to applicable rules.
- Portfolio: Collection of investments held by the scheme.
29. REITs and InvITs
REIT
REIT stands for Real Estate Investment Trust. It provides an investment structure related to income-generating real estate assets.
InvIT
InvIT stands for Infrastructure Investment Trust. It provides an investment structure for eligible infrastructure assets.
| Instrument | Primary Asset Theme |
|---|---|
| REIT | Real Estate |
| InvIT | Infrastructure |
30. Derivatives
A Derivative is a financial contract whose value is derived from an underlying asset, security, index, interest rate, currency or other permitted reference.
Examples of Underlying Assets
- Shares
- Stock indices
- Commodities
- Currencies
- Interest rates
Major Types
- Futures
- Options
- Forwards
- Swaps
31. Futures
A futures contract is a standardised exchange-traded contract to buy or sell an underlying asset at a predetermined price for settlement according to specified future terms.
Futures are commonly used for hedging, price exposure and trading strategies.
32. Options
An option gives the buyer a right, but not an obligation, to buy or sell an underlying asset at a specified price according to the contract terms.
Call Option
A call option gives the buyer the right to buy the underlying asset.
Put Option
A put option gives the buyer the right to sell the underlying asset.
33. Market Indices
A market index represents the performance of a selected basket of securities and is used as a benchmark for market performance.
| Index | Associated Exchange |
|---|---|
| NIFTY 50 | NSE |
| SENSEX | BSE |
Investors and analysts use indices to understand broad market movements and compare investment performance.
34. Bull Market and Bear Market
| Term | General Meaning |
|---|---|
| Bull Market | Market characterised by generally rising prices and optimistic sentiment. |
| Bear Market | Market characterised by generally falling prices and pessimistic sentiment. |
35. Market Capitalisation
Market capitalisation is the market value of a company's outstanding equity shares.
Broad Categories
- Large-cap companies
- Mid-cap companies
- Small-cap companies
The exact regulatory classification of large-, mid- and small-cap securities should be checked against the applicable current SEBI framework.
36. Dividend
A dividend is a distribution made by a company to eligible shareholders out of profits or other legally permitted sources according to the applicable framework.
Types
- Interim Dividend
- Final Dividend
37. Yield and Return
Return is the overall gain or loss from an investment. It can include income received and change in the market value of the investment.
Yield generally relates the income generated by an investment to its price or value, depending on the type of yield being measured.
38. Listing of Securities
Listing means admitting securities for trading on a recognised stock exchange according to applicable requirements.
Benefits
- Provides access to organised trading.
- Improves liquidity.
- Supports price discovery.
- Can improve visibility and access to investors.
- Requires compliance with applicable disclosure and listing obligations.
39. Delisting
Delisting means removal of securities from a stock exchange's trading platform according to applicable regulations and procedures.
Delisting can be voluntary or compulsory depending on the circumstances and regulatory requirements.
40. Capital Market vs Money Market
| Feature | Capital Market | Money Market |
|---|---|---|
| Purpose | Long-term finance | Short-term funds |
| Typical Maturity | More than one year / equity has no fixed maturity | Generally up to one year |
| Major Instruments | Shares, bonds, debentures, etc. | T-Bills, CP, CD, call/notice money, repo etc. |
| Main Market Participants | Companies, investors, institutions, governments and intermediaries | Banks, financial institutions, government and other eligible participants |
| Major Indian Regulators | SEBI primarily regulates securities markets | RBI primarily regulates the money market |
41. Primary Market vs Secondary Market
| Primary Market | Secondary Market |
|---|---|
| New securities are issued. | Existing securities are traded. |
| Issuer raises capital. | Investors trade among themselves. |
| IPO is an example. | Exchange trading is an example. |
| Capital formation is a major objective. | Liquidity and price discovery are major objectives. |
42. Equity vs Debt
| Feature | Equity | Debt |
|---|---|---|
| Nature | Ownership | Borrowed funds |
| Return | Dividend/capital appreciation | Interest/coupon |
| Voting Rights | Generally available to ordinary equity shareholders | Normally no ownership voting rights |
| Maturity | Usually no fixed maturity | Generally has maturity terms |
| Risk | Generally higher market and residual risk | Depends on issuer and instrument, but debt generally has contractual claims |
43. Regulation of Capital Market in India
India's securities market is regulated primarily through the legal and regulatory framework administered by SEBI, along with other institutions and laws applicable to specific market segments.
Important Institutions
- SEBI: Securities-market regulator.
- NSE: Major stock exchange.
- BSE: Major stock exchange.
- NSDL: Securities depository.
- CDSL: Securities depository.
- Clearing Corporations: Perform clearing and settlement functions according to the market structure.
- Stock Brokers: Facilitate transactions for investors.
44. Investor Protection
Investor protection is one of the fundamental objectives of securities market regulation.
Important Areas
- Disclosure of material information.
- Prevention of fraudulent practices.
- Prevention of market manipulation.
- Regulation of intermediaries.
- Investor grievance mechanisms.
- Market surveillance.
- Corporate governance requirements.
- Fair and transparent trading.
45. Major Capital Market Risks
| Risk | Meaning |
|---|---|
| Market Risk | Risk of loss because market prices move unfavourably. |
| Credit Risk | Risk that a borrower or issuer fails to meet obligations. |
| Liquidity Risk | Difficulty in selling an investment quickly at a reasonable price. |
| Interest Rate Risk | Risk caused by changes in interest rates. |
| Operational Risk | Loss arising from failed processes, people, systems or external events. |
46. Important Numerical Concepts
Market Capitalisation
Current Yield
Simple Capital Gain
Simple Return
Example
An investor purchases a share for ₹500 and later sells it for ₹650.
47. Common Capital Market Exam Traps
- Capital Market is mainly associated with long-term finance.
- Money Market is mainly associated with short-term funds.
- IPO belongs to the primary market.
- Normal exchange trading of existing shares belongs to the secondary market.
- SEBI is the principal securities-market regulator in India.
- NSE is associated with NIFTY 50.
- BSE is associated with SENSEX.
- Demat account is for holding securities electronically.
- Trading account is used for buying and selling securities.
- NSDL and CDSL are India's major depositories.
- Equity represents ownership.
- Bond represents debt.
- IPO means Initial Public Offering.
- FPO means Follow-on Public Offer.
- QIP means Qualified Institutional Placement.
- REIT is related to real estate.
- InvIT is related to infrastructure.
- A call option gives the buyer the right to buy.
- A put option gives the buyer the right to sell.
- Bonus issue does not mean fresh cash is received from shareholders for those bonus shares.
48. 100 Rapid Revision Facts
- Capital Market deals mainly with long-term finance.
- Money Market deals mainly with short-term funds.
- Capital Market is an important component of the financial system.
- Primary Market deals with new securities.
- Secondary Market deals with existing securities.
- IPO means Initial Public Offering.
- FPO means Follow-on Public Offer.
- QIP means Qualified Institutional Placement.
- OFS means Offer for Sale.
- Rights Issue provides an opportunity to existing eligible shareholders to subscribe.
- Bonus Issue involves additional shares issued to eligible existing shareholders under applicable rules.
- Equity shares represent ownership.
- Equity dividend is not guaranteed.
- Debt represents borrowed funds.
- Bonds are debt instruments.
- Debentures are debt instruments.
- Coupon refers to the stated interest on a bond.
- Maturity is the date/period when principal becomes due.
- Market price is the current traded price of a security.
- Market capitalisation measures the market value of outstanding equity shares.
- Market capitalisation = price per share × outstanding shares.
- NSE means National Stock Exchange of India.
- BSE means Bombay Stock Exchange.
- NIFTY 50 is associated with NSE.
- SENSEX is associated with BSE.
- SEBI means Securities and Exchange Board of India.
- SEBI regulates India's securities market under its statutory framework.
- NSDL means National Securities Depository Limited.
- CDSL means Central Depository Services (India) Limited.
- Depositories hold securities electronically.
- Demat means dematerialised.
- Demat account holds securities electronically.
- Trading account facilitates buying and selling.
- Stock exchanges facilitate organised securities trading.
- Secondary markets provide liquidity.
- Secondary markets help price discovery.
- Primary markets support capital formation.
- Mutual funds pool money from investors.
- NAV means Net Asset Value.
- AMC means Asset Management Company.
- SIP means Systematic Investment Plan.
- REIT means Real Estate Investment Trust.
- InvIT means Infrastructure Investment Trust.
- Derivatives derive their value from an underlying asset or reference.
- Futures are standardised contracts.
- Options give the buyer a right rather than an obligation.
- Call option = right to buy.
- Put option = right to sell.
- Option seller has the corresponding obligation if exercised.
- Market risk arises from adverse price movements.
- Liquidity risk relates to difficulty in selling an asset quickly.
- Credit risk relates to failure to meet obligations.
- Interest rate changes can affect bond prices.
- Bond prices and yields generally move inversely, other things being equal.
- Dividend is a distribution to shareholders subject to applicable rules.
- Interim dividend is declared during the financial year.
- Final dividend is associated with the end-of-year approval process.
- Listing allows securities to be traded on a recognised exchange subject to requirements.
- Delisting removes securities from exchange listing subject to applicable rules.
- Private placement is offered to selected investors.
- Capital markets help mobilise savings.
- Capital markets support investment.
- Capital markets support business expansion.
- Capital markets support infrastructure financing.
- Capital markets contribute to efficient allocation of capital.
- Price discovery is a major function of secondary markets.
- Liquidity is an important benefit of secondary markets.
- IPO is associated with a company's first public offering.
- FPO is associated with a further public offering by an already listed company.
- Rights issue is generally offered to existing eligible shareholders.
- Bonus shares are issued by capitalising eligible reserves or other permitted sources.
- QIP targets qualified institutional buyers.
- OFS generally involves sale of existing shares through an exchange mechanism.
- A stock broker facilitates trades for investors.
- Merchant bankers play important roles in issue management.
- Registrar and Transfer Agents maintain investor and issue-related records.
- Clearing determines obligations after trades.
- Settlement completes delivery of funds and securities.
- Capital market instruments can be equity or debt based.
- Equity investors are residual claimants.
- Debt holders generally have contractual claims.
- Preference shareholders have specified preferential rights over equity shareholders.
- A bond has a face value.
- A bond can have a coupon.
- A bond can have a maturity date.
- Yield measures return in relation to investment price/value depending on the definition used.
- Current yield uses annual coupon and current market price.
- Capital gain arises when an asset is sold above its purchase price.
- Capital loss arises when an asset is sold below its purchase price.
- Market indices act as benchmarks.
- NIFTY 50 is a major Indian equity benchmark.
- SENSEX is a major Indian equity benchmark.
- SEBI focuses on investor protection and market development and regulation.
- Capital market is broader than only the stock market.
- Debt securities are part of the capital market.
- Equity securities are part of the capital market.
- Mutual funds provide collective investment structures.
- REITs provide an investment structure related to real estate.
- InvITs provide an investment structure related to infrastructure.
- Understanding primary vs secondary market is essential for banking exams.
49. Frequently Asked Questions
Capital Market is the market for raising and investing mainly long-term funds through instruments such as equity and debt securities.
Primary Market and Secondary Market.
It is the market where new securities are issued.
It is the market where existing securities are traded.
IPO means Initial Public Offering. It refers to the first public offering of shares by a company.
FPO means Follow-on Public Offer and refers to a further public offering by an already listed company.
SEBI, the Securities and Exchange Board of India, is the principal securities-market regulator.
It is an account used to hold securities electronically.
NSE stands for National Stock Exchange of India and is associated with NIFTY 50. BSE stands for Bombay Stock Exchange and is associated with SENSEX.
A derivative is a financial contract whose value is derived from an underlying asset, index, rate or other reference.
A call option gives the buyer the right to buy the underlying asset according to the contract terms.
A put option gives the buyer the right to sell the underlying asset according to the contract terms.
It is the market value of a company's outstanding equity shares.
REIT means Real Estate Investment Trust.
InvIT means Infrastructure Investment Trust.
50. SEO Keyword Map
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| Exam Notes | capital market notes, capital market banking awareness, capital market notes for IBPS |
| Primary Market | primary market, primary market meaning, IPO, FPO, rights issue |
| Secondary Market | secondary market, stock market, secondary market meaning |
| Regulation | SEBI, capital market regulator India, securities market regulation |
| Instruments | capital market instruments, equity shares, bonds, debentures |
| Competitive Exams | capital market IBPS, capital market SBI, capital market RRB, banking awareness 2026 |
Suggested Internal Links
Final One-Page Memory Chart
| Concept | Remember |
|---|---|
| Capital Market | Long-term finance |
| Primary Market | New securities |
| Secondary Market | Existing securities |
| IPO | Initial Public Offering |
| FPO | Follow-on Public Offer |
| QIP | Qualified Institutional Placement |
| OFS | Offer for Sale |
| SEBI | Securities-market regulator |
| NSE | NIFTY 50 |
| BSE | SENSEX |
| NSDL / CDSL | Depositories |
| Demat | Electronic holding of securities |
| REIT | Real Estate Investment Trust |
| InvIT | Infrastructure Investment Trust |
| Derivative | Value derived from underlying |
| Call Option | Right to Buy |
| Put Option | Right to Sell |
| Equity | Ownership |
| Bond | Debt |
| Money Market | Short-term funds |
Official Verification Sources
For current regulatory requirements, investors and exam-preparation material should verify the latest information from official regulatory sources.