- Financial Market is a market for creation and exchange of financial assets.
- It helps in mobilisation (moving) and channelising the savings into most productive uses.
- Financial markets also help in price discovery and provide liquidity to financial assets.
Concept of Financial Markets
|What are the two sectors of an economic system?|
|How does a financial market help the savers and the investors?|
|What are the two consequences of proper allocative function?|
|Which are the two major alternative mechanisms through which allocation of funds can be done?|
|Households can deposit their surplus funds with banks, who in turn could lend these funds to business firms. Alternately, households can buy the shares and debentures offered by a business using financial markets.|
|The process by which allocation of funds is done is called financial inter-mediation.|
|Banks and financial markets are competing intermediaries in the financial system, and give households a choice of where they want to place their savings.|
|A financial market is a market for the creation and exchange of financial assets. Financial markets exist wherever a financial transaction occurs. Financial transactions could be in the form of creation of financial assets such as the initial issue of shares and debentures by a firm or the purchase and sale of existing financial assets like equity shares, debentures and bonds.|
- Money Market is a market for short-term funds.
- It deals in monetary assets whose period of maturity is less than one year.
- The instruments of money market includes:
- Treasury bills,
- Commercial paper,
- Call money,
- Certificate of deposit,
- Commercial bills,
- Participation certificates
- Money market mutual funds.
- Capital Market is a place where long-term funds are mobilised by the corporate undertakings and Government.
- What is the duration of the securities of the capital markets?
- Medium term securities
- Long term securities.
- Who can participate in the capital markets?
- Commercial firms,
- Development banks,
- Financial institution,
- Foreign investors,
- What are the instruments of capital market?
- Equity shares,
- Preference shares
- What is the investment outlay (expense) in the capital market?
- Which market is safer – money market or capital market? Why?
Money market is safer than capital market? It is because money market is short term investment with a maturity period of maximum 1 year. Besides, capital markets are risky as they are long term sources of funds.
- Capital Market may be divided into:
- Primary market – Deals with new securities which were not previously tradable to the public.
- Secondary market – A place where existing securities are bought and sold.
1. Primary Market
- What are the methods of flotation (floatation) in the primary market?
- Offer through Prospectus
- Most commonly used method of raising funds by public companies,
- Makes a direct appeal to raise capital through advertisements in newspapers and magazines (Companies use underwriters and brokers for this).
- The issue (of prospectus) is required to be listed on at least one stock exchange.
- Should be in accordance with:
- The provisions of Companies Act
- SEBI disclosure,
- Investor’s protection guidelines.
- Offer for Sale
- Not issued directly to the public,
- Issued first to intermediaries (brokers and issue houses) at a fixed price.
- These intermediaries resell these securities to the investing public at a higher price.
- Private Placement
- Securities are sold to selected institutional investors and individuals.
- This helps to raise capital more quickly as compared to public issue.
- This method is economical because it does not need to fulfill many mandatory public issues.
- This is ideal for those companies who cannot afford a public issue.
- Rights Issue
- Companies can offer new shares to their existing shareholders in proportion of shares already held by them.
- This method gives pre-emptive rights to its existing shareholders to subscribe to new issue of shares according to the terms and conditions of the company.
- e-IPOs (Electronic Initial Public Offer)
- Offer through Prospectus
2. Secondary Market (Stock Exchange / Share Market)
- What are stock exchanges?
Stock Exchanges are the organisations which provide a platform for buying and selling of existing securities.
- What are the functions of stock exchanges?
- Stock exchanges provide liquidity and marketability to existing securities as they provide a platform for sale and purchase of securities.
- Stock exchanges help in determination of price of securities.
- Stock exchanges contribute to economic growth through allocative functions.
- Stock exchanges ensure safety of transaction as all the transactions are electronic and they take place under the knowledge of SEBI.
- Stock exchanges help spread equity cult. They do whatever is possible to induce as many people as investors in stocks of companies.
- Example 1 – Education of investors
- Example 2 – Transparency of transactions.
- Stock exchanges provide scope for speculation.
- What is the trading process on a stock exchange?
- Selection of brokers,
- Opening the demat account,
- Placing the order,
- Connecting to the stock exchange,
- Executing the order,
- Issuing of contract note,
- Delivery of cash/securities → Pay-in Day
- Settlement before T+2 (Transaction day + 2 more days = 3 days).
- Delivery of security / cash → Pay-out Day
- Delivery of securities in demat form (electronic form)
- The National Stock Exchange of India is the latest, most modern and technology driven exchange and was incorporated in 1992.
- OTCEI was incorporated in 1992 to provide listing facility for small companies with paid up capital of less than 3 crores.
- SEBI (Securities and Exchange Board of India) was established in 1988 and was given statutory status through an Act in 1992.
- The SEBI was set-up to:
- Protect the interests of investors,
- Development and regulation of securities market.
- Financial Market
- Money Market
- Treasury Bills
- Commercial Paper
- Call Money
- Certificate of Deposit
- Commercial Bill
- Money Market
- Mutual Fund Capital
- Primary Market
- Secondary Market
- Stock Exchange