Capital Market I – SS3 Financial Accounting Lesson Note (First Term)

The capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. It is a source of long-term finance. It has two types: the primary market, which deals with new securities, and the secondary market, or stock exchange, where existing securities are traded. Companies can raise funds through five methods.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define capital market.
2. State the functions of the capital market.
3. List four methods of raising funds from the capital market.

Instructional techniques and materials

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

What is the capital market?

The capital market can be defined as the market for long-term finances or loans. It can also be defined as a financial market in which long-term debt or equity-backed securities are bought and sold.

What are the types of capital market?

Primary market

The primary market is also known as the New Issue Market. It deals with the issue of new securities or shares.

Secondary market

The secondary market is also known as the stock market or stock exchange. It is the market for trading existing securities.

What are the functions of the capital market?

• It makes trading of securities easier for investors and companies.
• It helps minimise transaction costs and information costs.
• It mobilises the savings of parties from cash and other forms into the financial market.
• It offers insurance against market risk. It does this by offering insurance against market or price threat through imitative trading.

What are the methods of raising funds from the capital market?

The following are methods by which a company can raise funds.

Offer through prospectus

A prospectus is a document used by companies to invite members of the public or investors to invest in their company. It is a method used in the primary market to raise funds. After a prospectus is issued, the public subscribes to shares, debentures, etc.

Offer for sale

By this method, the issue of shares is allotted to an issuing house, which offers the securities to the public using a document called an offer for sale. The issuing house can be a finance house or a merchant bank.

Rights issue

A company can raise further funds by issuing shares to existing members (shareholders) on favourable terms.

Private placement

Under private placement, the company sells its shares to financial institutions, banks, insurance companies and some select individuals.

By introduction

A company can apply to the stock exchange for the sale of its shares to the public. The offer for a new issue of shares is then made through the stock exchange.

Evaluation

1. What is the capital market?
2. Mention two types of capital markets.
3. State four functions of the capital market.
4. List four methods of raising funds from the capital market.
5. State four differences between debentures and shares.
6. State four features of the capital market.

Classwork: As in evaluation.

The teacher commends the students positively.

Assignment

1. Distinguish between the primary market and the secondary market.
2. Explain any two methods of raising funds from the capital market.