Capital Market: formula sheet

Key formulas

Capital market vs money market: term

Capital market: long-term (generally > 1 year); Money market: short-term (up to 1 year)

This is the main distinguishing point. Always state it first.

Structure of capital market

Capital market = Primary market (new issues) + Secondary market (trading of existing securities)

Funds reach the company only in the primary market.

Order of claim on company

Debenture holders and bondholders → Preference shareholders → Equity shareholders

Applies to payment of income and repayment on winding up. Equity is the residual claimant.

Derivative value

Value of derivative = f(value of underlying asset)

A derivative has no independent value. It derives from shares, indices, commodities or currencies.

Rights entitlement

New shares offered = Existing shares held × Rights ratio

For a 1:4 rights issue, a holder of 400 shares is offered 100 new shares.

Theoretical ex-rights price (TERP)

TERP = (Market price × Old shares + Issue price × New shares) ÷ (Old shares + New shares)

Use for the same block of shares, such as 4 old and 1 new.

Value of a right (per share)

Value of right = Cum-rights market price − TERP

Equals the gain from buying one new share at the rights price, per old share held, after adjusting for the ratio.

Bonus issue effect

Free reserves fall and share capital rises by the same amount; net worth is unchanged

Number of shares rises, so EPS and market price per share usually fall in proportion, all else equal.

Issue size

Funds raised = Number of shares issued × Issue price

Applies to public, rights and private placement. For a bonus issue, funds raised = nil.

Primary vs secondary market

Primary = new issue, money goes to issuer; Secondary = existing securities, money goes to selling investor

The most common comparison asked. Write at least 4 points of difference.

Settlement date

Settlement day = Trade day (T) + number of working days in the cycle (T+n)

Count only working days, excluding exchange holidays and weekends. Use the n given in the question.

Net amount payable on a purchase

Amount = (Number of shares × Price) + brokerage and other charges

For a sale, charges are deducted from the sale value.

Underwriting liability

Shortfall = Total shares offered − Total applications received (minimum nil). Gross liability = Total shares offered × Underwriter's proportion. Net liability = Gross liability − Marked applications in its favour − its share of unmarked applications (minimum nil).

Without marked applications, the total shortfall is simply shared in the underwriting ratio, as in the worked example below. Marked applications carry the underwriter's name and are credited to that underwriter; unmarked applications are shared in the underwriting ratio. Liability cannot be negative; if it works out below nil, it is nil.

Underwriting commission

Commission = Rate % × (Number of shares underwritten × Issue price)

Commission is calculated on the total issue price of the shares underwritten, whether or not the underwriter has to take up any shares. Use the rate given in the question.

Demat flow

Investor → Depository Participant → Depository (NSDL / CDSL) → Issuer's records

Use this chain to answer how the depository system works.

SEBI's three-fold objective

Protect investors + Promote development + Regulate the market

Use this as the frame for any 'role of SEBI' answer.

Classification of functions

Protective + Developmental + Regulatory

Group each function under one head to score structure marks.

Classification of powers

Quasi-legislative + Quasi-executive + Quasi-judicial

Rule-making, investigation and enforcement, and adjudication respectively.

Appeal route

SEBI order → Securities Appellate Tribunal (SAT)

Further appeal from SAT lies to the Supreme Court.

Market capitalisation

Market cap = Market price per share × Total shares outstanding

Used for full market-cap weighting.

Free-float market capitalisation

Free-float market cap = Market price × Free-float shares

Free-float shares = total shares minus promoter and other locked-in holdings. Used by Sensex and Nifty.

Free-float factor

Free-float factor = Free-float shares ÷ Total shares

A fraction between 0 and 1. Free-float market cap = Market cap × free-float factor.

Index value (market-cap method)

Index = (Current free-float market cap of basket ÷ Base market cap) × Base index value

Base value is commonly 100 or 1,000 depending on the index.

Index return

Return % = (Closing index − Opening index) ÷ Opening index × 100

Gives percentage change in the market over the period.

EMH forms

Weak: past prices. Semi-strong: all public information. Strong: all information including private.

Each form includes the information set of the weaker form.

Quick revision

• Capital market deals in long-term securities; money market deals in short-term funds.
• Primary market is where new securities are issued; secondary market is where existing ones are traded.
• Methods of issue include public issue, rights issue, private placement and bonus issue; know the meaning of each.
• A rights issue offers new shares to existing shareholders first.
• Stock exchanges give liquidity and a fair price-discovery platform.
• Depositories hold securities in electronic form; depository participants are their agents for investors.
• Merchant bankers, registrars and brokers each have a distinct role; learn them as a list.
• SEBI protects investors, promotes market development and regulates intermediaries.
• A stock index measures the overall movement of a group of selected shares.
• Market efficiency is about how quickly prices reflect available information.
• Know the three usual forms of efficiency: weak, semi-strong and strong.

Common mistakes

• Saying the capital market deals only with shares. Fix: Include debentures, bonds, preference shares and derivatives. Say the market covers both equity and debt.
• Treating a debenture holder as an owner of the company. Fix: A debenture holder is a creditor with fixed interest. Only shareholders are owners.
• Treating book building as a separate method like rights or bonus. Fix: Say it is a price discovery process used in a public issue, with a price band and bids.
• Saying a bonus issue raises funds. Fix: Remember that bonus shares are issued by capitalising reserves, so cash raised is nil and net worth is unchanged.
• Saying the company receives money when shares trade on the exchange. Fix: Remember that secondary trades move money between investors. The issuer gets funds only at the issue stage.
• Writing that unlisted shares can be traded on the exchange's main trading platform. Fix: State that only listed securities are traded on the exchange. Listing is the entry ticket.
• Saying a depository and a depository participant are the same. Fix: A depository (NSDL or CDSL) holds securities. A DP is the agent through which you access it, like a branch.
• Confusing merchant banker with underwriter. Fix: Merchant banker manages the whole issue. Underwriter only guarantees subscription for commission.
• Saying SEBI regulates banks and NBFCs. Fix: SEBI regulates the securities market. RBI regulates banks and NBFCs, IRDAI insurance and PFRDA pensions.
• Writing that SEBI was created by the 1992 Act from nothing. Fix: Say SEBI was established in 1988 and given statutory powers by the SEBI Act, 1992.

Exam tips

• For MCQs, the capital market is long-term, and the money market is short-term. Check this first, then scan the options.
• In differentiation answers, give at least five paired points. Step marks are given for each distinct point.
• Draw a small structure chart of primary and secondary markets with instruments. It shows classification quickly.
• Use Indian references, such as NSE, BSE, SEBI, IPO and government securities, to make answers specific.
• Keep definitions precise. Say a debenture holder is a creditor and an equity holder is an owner.
• For rights versus bonus, always cover four points: who gets it, cash inflow, price paid and effect on net worth.
• In MCQs, 'no cash raised' or 'capitalisation of reserves' points to a bonus issue.
• Show the TERP working line by line. Step marks are given even if the final number slips.