10 H

CHAPTER-10

Financial Markets

  Financial Markets

Ø Functions of the Financial Markets :

(i)    Facilitates price discovery : Price is determined where demand and supply of funds intersect.

(ii)  Mobilisation of savings and channelising them into the most productive use : Facilitates transfer of savings from the savers to the investors.

(iii) Provides liquidity to financial assets : Facilitates easy purchase and sale of financial assets.

(iv)  Reducing the cost of transaction : Save time, effort and money by providing valuable information about securities.

Ø Types of Financial Markets :

(i)    Money Market;

(ii)   Capital Market.

  Money Market and Its Instruments

Ø Money market : Market for short term funds and securities having maturity upto one year.

Ø Types of money market instruments : Following are the money market instruments :

(i)      Commercial paper :

(a)  Issued by the large and credit worthy companies.

(b)  Maturity period is 15 days to 1 year.

(c)   Usually, issued at discount and redeemed at par.

(d)  Used for bridge financing.

(ii)    Call money :

(a)  A bank borrows call money from other bank.

(b)  Used to maintain cash reserve ratio.

(c)   Maturity period is from 1 day to 15 days.

(iii) Certificate of deposit :

(a)  Issued by the commercial banks and the financial institutions.

(b)  Used to meet high demand for credit.

(iv) Commercial bill :

(a)  Issued by firms to meet working capital requirements.

(b)  Trade bill, when accepted by bank, becomes commercial bill.

(v)    Treasury bill :

(a)  Issued by RBI on behalf of the Government of India.

(b)  Issued at discount and redeemed at par.

(c)   Maturity period is from 14 days to 364 days.

(d)  Also called Zero Coupon Bonds.

  Capital Market and Its Types (Primary and Secondary)

Ø Capital Market : It refers to whole market of organisations institutions through which medium and long-term funds; both debt and equity are raised and invested.

Ø Components of Capital Market :

(i) Primary Market : It refers to the market wherein securities (shares, debentures) are sold for the first time. It is also known as new issue market. The various methods of floatation are :

(a)  Offer through prospectus : Company invites subscription from public through the issue of prospectus by advertising in newspapers and magazines.

(b)   Offer for sale : Securities are offered for sale through intermediaries like stock brokers, banks, etc.

(c)  Private placement : Company allots securities to the institutional investors and to the selected individuals.

(d)   Right issue : Company offers its existing shareholders to buy new shares in proportion to their existing shares.

(e)   e-IPOs : Company issues securities to public through the online system of the stock exchange.

(ii) Secondary Market : It refers to the market for sale and purchase of previously issued securities. It is also known as stock exchange.

  Stock Exchange-Functions and Trading Procedure

Ø Functions of a Stock Exchange :

(i)      Provides liquidity and marketability to existing securities.

(ii)    Ensures safety of transactions.

(iii)  Contributes to economic growth.

(iv)  Spreads out equity cult.

(v)    Determines price of securities.

(vi)  Provides scope for speculation.

Ø Trading Procedure on a Stock Exchange :

(i)      Selecting a broker.

(ii)    Opening a demat account.

(iii)  Placing an order.

(iv)  Executing the order.

(v)      Settlement of transaction.

  Securities and Exchange Board of India (SEBI)

Ø Securities and Exchange Board of India (SEBI) : It was established by the Indian Government in 1988 under the administrative control of the Ministry of Finance, Government of India. Later, it became a statutory body under the SEBI Act, 1992.

Ø Objectives of SEBI :

(i)     To regulate stock exchanges.

(ii)   To protect investor’s rights and interests.

(iii) To prevent trading malpractices.

(iv) To develop the code of conduct.

Ø Functions of the SEBI :

I.  Regulatory Functions :

(i)   Registration of players in the market.

(ii)   Registration of investment schemes.

(iii)   Regulation of intermediaries.

(iv)  Regulation of takeover bids.

(v)  Calling for information.

(vi)  Levying fees.

(vii)  Others as delegated by the Govt. of India.

II.Developmental Functions :

(i)   Training of intermediaries.

(ii)   Conducting research.

(iii)   Developing capital markets.

III. Protective Functions :

(i)   Prohibition of unfair trade practices.

(ii)   Controlling insider trading.

(iii)   Investors’ protection.

(iv)  Promotion of fair practices and code of conduct.

Ø Depository services :

(i)       Opening a demat account.

(ii)     De-materialisation.

(iii)   Re-materialisation.

(iv)   Record of securities.

(v)     Settlement of transactions.

(vi)   Facilitating loan against the securities.

(vii) Freezing demat account.

Ø Players in depository system :

(i)       Depository.

(ii)     Depository participant.

(iii)   Beneficial owner.

(iv)   Issuer.

  Know the Terms

Ø Financial Market : It is a market for the creation and exchange of financial assets. It brings lenders and borrowers together, making available funds to those who wish to pay for their use.

Ø Stock Exchange : It is an institution which provides a platform for buying and selling of existing securities.

Ø Depository : It is an organisation which holds securities in electronic form at the request of investors through registered depository participant. Two main depositories in India are NSDL and CDSL.

Ø Price Rigging : Manipulating market prices of securities.

Ø Insider Trading : Insiders use the privileged information to make personal profits.

Ø Bull : A speculator who expects a rise in the prices.

Ø Bear : A speculator who expects a fall in the prices.

Ø Sensex : Benchmark index of BSE.

Ø Nifty : Benchmark index of NSE.

Ø NASDAQ : National Stock Exchange of America