DEFINITION

Global Capital Market refers to a cross-border market for securities that are used to finance long-term capital needs of companies. The global capital market is used primarily by large, sophisticated corporations that sell their stocks and bonds to institutional investors, like mutual funds, pension funds and other investment companies. Financial transactions in the global capital markets take place in the world's biggest financial centres, like New York and London.

GLOBAL CAPITAL MARKET

GLOBAL MONEY MARKET

GLOBAL BOND MARKET

GLOBAL STOCK MARKET

GLOBAL LOAN MARKET

GLOBAL MONEY MARKETS

They are the market in which foreign monies are financed or invested. For Example Hitachi & Matsushita borrowed U.S. dollars from several U.S. banks in Tokyo to finance their worldwide operations. MNEs use global or international money markets to finance global operations at lower cost than is possible domestically. They borrow currencies' that have a lower interest rates and are expected to depreciate against their own currency. They incur risk that currencies borrowed may appreciate, which will increase their cost of financing.

Investors on other hand, may achieve sustainably higher returns in foreign markets than in their domestic markets when investing in currencies that appreciate against their home currency. However if these currencies depreciate , the effective yield on foreign investment will likely to be lower than domestic yield and may be even negative. Investors attempt to capitalize on potentially high effective yields on foreign money market securities , while reducing the exchange rate risk by diversifying investment across currencies.

The Eurocurrency markets consists of commercial banks that accepts large deposits and provide large loans in foreign currencies . Often, transactions in global money markets are conducted via the Euro currency market. Eurodollars represents U.S dollars deposits in non-U.S. banks. When interest rates ceilings are imposed on dollar deposits in US banks , corporations with large dollar balances often deposits their funds overseas to receive a higher yield.

GLOBAL BONDS MARKETS

They are the markets where government bonds or corporate bonds are issued, bought, or sold in foreign countries like China International Trust and Investment Corporation, or CITIC, issued its corporate bonds in Japan, Europe, and the U.S. during the 1980s and 1990s. Although debt financing has always been international in nature, there is still no unified international bond market. The international bond market is divided into three bond market groups: i. Domestic bonds. They are issued locally by a domestic borrower and are usually denominated in the local currency. ii. Foreign bonds. They are issued on a local market by a foreign borrower and are usually denominated in the local currency. Foreign bond issues and trading are under the supervision of local market authorities. iii. Eurobonds. They are underwritten by a multinational syndicate of banks and placed mainly in countries other than the one in whose currency the bond is denominated. These bonds are not traded on a specific national bond market.

Some issuers of bond in the Eurobond market include DiamlerChrysler Financial, Citicorp, General Motors Acceptance Corp. and the World Bank. DiamlerChrysler Financial Corp. now obtains about one fourth of its funds from the Eurobond market.

Type of Bond Instruments

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Straight or fixed income bonds: a fixed income bond is a financial instrument with specific interest payments on specified dates over a period of years. On the last specified date, or maturity, the payment includes a repayment of principal. The interest rate or coupon is expressed as a percentage of the issue amount and is fixed at launch. For the issuer, the attraction of these bonds is the knowledge of level payments on interest and a set repayment schedule. For investors, the attraction of straight bonds lies in a known income. Partly-paid bonds: these are standard straight bonds in all respects but for the payment of principal by investors on the closing date of the issue -which is limited to 0-33 percent of the principal amount, with the balance falling due up to six months later. These bonds are popular with issuers who can tailor the second payment to their cash flow requirements.

   

Dual-currency bonds: Dual-currency bonds are bonds that are purchased in terms of one currency but pay coupons or repay principal at maturity in terms of a second currency. Japanese firms have frequently issued CHF-denominated bonds convertible into common shares of a Japanese company. A foreign investor can benefit from purchasing this bond in any one of three situations: A drop in the market interest rate on CHF bonds (as on any straight CHF bond). A rise in the price of the company's stock (because the bonds are convertible into stocks). A rise in the JPY relative to the CHF (because the bond is convertible into a JPY asset). Dual currency bonds represent a combination of an ordinary bond combined with one or more forward contracts. Bonds with warrants: Bonds with warrants resemble convertibles except that the warrant can be traded separately. The proceeds from the warrants are applied to the reduction of the cost of the host bond. Bonds can have equity warrants, bond warrants, or commodity warrants attached. Bonds with equity warrants differ from convertible bonds in one other aspect: when the warrants are exercised new money is normally used to subscribe for the shares, and the total capitalization of the borrower increases. This is unlike the conversion of a convertible bond, which merely shifts debt capital into equity capital. The equity warrant is effectively a call option on the underlying stock.

Zero-coupon bonds: a zero-coupon bond is a straight bond with no schedule of periodic interest payments. The cash flow consists of two payments, the receipt of the proceeds on issue date and the repayment of principal on maturity. For the issuer, zero coupon bonds are an ideal financing instrument for a project, which generates no income for some years. On the other hand, the loading of the debt service of the bond into a single payment some years later creates a higher credit risk. For this reason the market is confined to highly rated borrowers. Investors are attracted to zero-coupon bonds to meet future liabilities. Floating rate notes (FRNs): FRNs are a medium-term instrument similar in structure to straight bonds but for the interest base and interest rate calculations. The coupon rate is reset at specified regular intervals, normally 3 months, 6 months, or one year. The coupon comprises a money market rate (e.g., the London Interbank Offered Rate for 6-month deposits, or LIBOR) plus a margin, which reflects the creditworthiness of the issuer. FRNs usually carry a prepayment option for the issuer. Issuers like FRNs because they combine the lower pricing of a bank loan and larger maturities than the straight bond market. Investors are attracted to FRNs because the periodic resetting of the coupon offers the strongest protection of capital.

GLOBAL STOCK MARKETS

Global or International stock markets are markets where company stocks are listed and are traded on foreign exchange. For example, Nokia of Finland issued stock on NYSE. Firms in needs of financing use foreign stock markets as additional source of funds The ability of firms to place new shares in foreign markets depends partially on the stocks perceived liquidity in the market. A secondary market in the stock must be established in foreign markets to enhance liquidity and make newly issued stocks more attractive.

Firms in need of financing use foreign stock on the market as additional source of funds. Investors use foreign stock markets to enhance their portfolio performance. This financing source allows MNEs to attract more funds without flooding their home stock market, avoiding a decline in the share price. A large no. of MNEs issue stock in foreign markets to circumvent regulations, since regulatory provisions differ among markets. Further listing on foreign stock exchange not only enhances the stocks liquidity but also increases the firms perceived financial standing when exchange approves the listing application. Also the corporations get worldwide recognition among customers. It also the protect the firm against hostile takeovers because it disperses ownership and , makes it more difficult for other firms to gain controlling interest.

The size of the world stock market was estimated at about $36.6 trillion at the start of October 2008.[1] The total world derivatives market has been estimated at about $791 trillion face or nominal value,[2] 11 times the size of the entire world economy.[3] The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is the New York Stock Exchange (NYSE). In Canada, the largest stock market is the Toronto Stock Exchange. Major European examples of stock exchanges include the Amsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Brse (Frankfurt Stock Exchange). In Africa, examples include Nigerian Stock Exchange, JSE Limited, etc. Asian examples include the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV.

GLOBAL LOAN MARKET

Loan markets involve large commercial banks and other lending institutions providing loans for foreign companies . Banks from all countries perceive international lending as means of diversification. A portfolio of loans to borrowers across various countries is less susceptible to recession in the bank home country. International lending also allows banks to develop relationships with foreign firms which create demand for banks other services.

In additions , a large portion of international lending is to support international acquisitions . Commercial banks and investment banks serve not only as advisers but also as financial intermediaries by placing stocks and bonds or by providing loans. Lending to developing countries often requires credit checking. International commercial banks and other lending institutions do so based on analysis by credit rating agencies such as standards & poors and Moodys. Notably Political risk and overall pressure on balance of payments and macroeconomic conditions are the focus of analysis.

Factors used in Sovereign rating by S&P

     

Political Risk Form of government and adaptability of political instruments Extent of political participation Orderliness of leadership succession Degree of consensus on economic policy objectives Integration into global trade and financial system Internal and external security risks

       

Economic Factors Income and economic structure Economic growth prospects Fiscal flexibility Public debt burden Price stability BOPs flexibility External debt and liquidity

OBSTACLES IN GLOBAL CAPITAL MARKETS

1.Information barriers. 2.Political and capital control risks. 3.Foreign exchange risks. 4.Restrictions on foreign investment and control. 5.Taxation. 6.Higher costs.

How To Raise Money In Global Capital Market

Determine the capital needs of your company. How much money can your company absorb without overextending itself? Do you need equity capital or debt capital? New equity capital can be raised by issuing new shares, while debt capital can be acquired though a bond issue or with a bank loan. Think about whether you can satisfy your capital needs in the domestic market. Raising money in the country where your company is based is easier and normally costs less than going overseas in search of investments in your business. Can you cover your needs by a domestic issuance of shares or bonds? If it's not enough, you may need to tap into the global capital market. Look at what your competitors are doing in this respect and try not to fall behind (if they are getting funds from the global capital markets, you should probably do likewise).

Determine how you can access the global capital market. Contact investment banks and seek their help. One of the most popular ways to get access to the global capital market is though an initial public offering (IPO). An IPO is a sale of your firm's securities, usually common stocks, to the investing public on an organized stock exchange such as the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE). Doing an IPO requires a lot of time, energy and money from the firms' executives and directors. At the same time, it transforms the way a firm is run, turning it into a public company that needs to make sure it meets its investors' expectations in terms of dividend payouts and corporate strategy.

Choose the best option for raising money from the global capital market and plan how you will go about raising the required capital. Whether you choose an IPO or a bonds issue, you will have to prepare for it, making changes to your corporate governance and financial reporting. You will need to audit your corporate financial accounts, hire a PR firm and prepare a prospectus--a business plan that also has information on the securities being issued. Contact your investment bank to get more help with this. Carry out your capital raising plan. Work closely with your investment bank to do everything required to sell your shares or bonds to global investors. Be flexible. If you see a lack of demand for your securities, you may need to postpone the offering until market conditions recover.