Notes - Financial Market
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12.1 Meaning of Financial Market
A financial market is a market for creation and exchange of financial assets when company issue shares, debentures, it is celled creation of financial assets, while their sole-purchase in the financial market is called exchange of financial assets.
12.1.1 Functions of Financial Market
12.1.2 Types of Financial Market
It is a market for short-term securities, whose maturity period is upto one year. It is a market where low risk, unsecured and short-term debt instruments are traded. Major participants in this market are Reserve Bank of India, commercial banks, State Government, mutual funds, etc.
Money Market Instruments
Various money markets instruments are:
(i) Treasury Bills: It is a short-term instrument issued by the Government of India, maturing in less than one year. They are also called zero coupon bonds, which are issued at discount and repaid at par. They are highly liquid, have assured yield and are available for a minimum account of ` 25000 and in multiples thereof.
(ii) Commercial Paper: It is a short-term, unsecured promissory note, negotiable and transferable by endorsement and delivery. It is issued by large creditworthy companies to raise short-term funds at lower rates than the market rates. It is sold at a discount and redeemed at par and used for meeting working capital requirements of the company. Sometimes, commercial papers are used to meet the floatation costs. This is called bridge financing.
(iii) Call Money: It is a short-term finance, repayable on demand, within a period of 15 days, for interbank transactions. Commercial banks have to maintain a minimum cash balance called Cash Reserve Ratio (CRR). Call money helps banks to borrow from each other to be able to maintain the CRR. Interest paid on call money is called call rate, which is highly volatile. It varies from day-to-day and hour-to-hour.
(iv) Certificate of Deposit: They are unsecured, negotiable, short-term instruments, issued by commercial banks and financial institutions. They are issued when the deposit growth of banks is slow but the demand for credit is high which helps to mobilise large funds for short period.
(v) Commercial Bills: When goods are sold on credit, the seller draws a bill to be accepted by the buyer. On acceptance, it becomes a bill of exchange. The seller (drawer) can wait for the bill to mature or get it discounted from his bank at a nominal discount. On being discounted, it becomes a commercial bill. It is a short-term, negotiable and self-liquidating instrument used to finance credit sales of the firms.
It is a market for medium and long-term funds. This market facilitates such arrangement through which both debt and equity are raised and invested. It consists of development banks, commercial banks and stock exchanges. The capital market can be divided into two parts, which are as follows:
(i) Primary Market
This market deals with the new issue of securities. It is also known as new issue market. It facilitates capital formation in the economy by channelising public savings into productive investments.
Methods of Floatation in Primary Market
There are various methods by which securities are issued in the primary market:
(a) Offer Through Prospectus: A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. Such an issue must be listed on atleast one stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI guidelines.
(b) Offer for Sale: Under this method, securities are not issued directly to the public, but are offered for sale through intermediaries like stock brokers. The company sells securities enbloc, at an agreed price to brokers, who in turn, resell them to the investing public.
(c) Private Placement: It refers to the allotment of securities by a company to institutional investors and selected individuals. It helps to raise capital more quickly and with less cost than a public issue.
(d) Rights Issue: It is a privilege given to existing shareholders, to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered ‘right’ to buy new shares in proportion to the number of shares, they already possess.
(e) e-IPOs: A company can issue shares to the public through the online system of stock exchange. For this, it is necessary that the company enters into an agreement with the stock exchange. SEBI registered brokers have to be appointed for the purpose of accepting applications and placing order with the company.
(ii) Secondary Market
It is also known as stock exchange or stock market. It is a market for sale and purchase of securities. It helps existing investors to disinvest and fresh investors to enter the market. It contributes to economic growth through the process of disinvestment and reinvestment.
12.2 Stock Exchange
It is an institution which provides a platform for buying and selling of existing securities. It helps companies to raise finance, provide liquidity and safety of investment to the investors.
According to Securities Contracts (Regulation) Act, 1956, ‘Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities’.
12.2.1 Functions of a Stock Exchange
A stock exchange performs the following functions:
(i) Providing Liquidity and Marketability to Existing Securities: It facilitates regular sale and purchase of securities. It gives a chance of disinvestment and reinvestment to the investors, providing liquidity and marketability to existing securities.
(ii) Pricing of Securities: Prices of securities are determined on a stock exchange by the forces of their market demand and supply.
(iii) Safety of Transactions: The investors get a fair and safe deal on the market as it is well regulated and its dealings are well-defined according to the existing legal framework.
(iv) Contribution to Economic Growth: Through the process of disinvestment and reinvestment, savings get channelised into their most productive investment avenues. This leads to capital formation and economic growth.
(v) Spreading of Equity Cult: It ensures wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.
(vi) Scope for Speculation: It provides sufficient scope for speculative activity in a restricted and controlled manner in order to ensure liquidity and price continuity in the stock market.
12.2.2 Types of Operators
The different types of operators are:
(i) Brokers: He is a member of stock exchange, who buys and sells securities on behalf of outsiders/non-members. He charges brokerage or commission for his services.
(ii) Jobbers: He is a member of stock exchange, who buys and sells securities on his own behalf. He is specialised in one type of security and makes profit by selling the securities at a higher price. In Mumbai Stock Exchange, he is called Tarawaniwala.
(iii) Bulls: He is a speculator, who expects a rise in the price of his securities. In Mumbai Stock Exchange, he is called Tejiwala.
(iv) Bears: He is a speculator, who expects a fall in the value of his securities. In Mumbai Stock Exchange, he is called Mandiwala.
(v) Stag: He is a speculator, who subscribes to a new issue, expecting the price of the stock to rise immediately at the starting time of trading. The sole aim of a stag is to sell the shares soon after allotment to make a quick profit.
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Stock Market Index
It refers to that index which exhibits the trend in the share market. It reflects market direction and indicates day-to-day fluctuations in stock prices. It is prepared on the basis of some representative companies, generally those companies in whose shares, there is a lot of trading. It is the economic barometer of the country as the rising .index indicates prosperity of the companies. Some stock market indexes are:
Indian Stock Market Indexes Major Indian stock market indexes are: · SENSEX: The Bombay Stock Exchange (BSE) Sensitive Index, popularly known as SENSEX, shows the rise and fall in the market price of shares on the basis of 30 companies. These account for half of BSE’s market capitalisation and represent 13 sectors of the economy. · CNX Nifty: Also called the Nifty 50 or simply Nifty, is a NationalStock Exchange (NSE) of India’s benchmark of stock market index for Indian equity market. The CNX Nifty is made up of 50 companies and covers 22 sectors of the Indian economy.
International Stock Market Indexes Some of them are: · Dow Jones Industrial Average: It is the oldest quoted stock market index in the US. · nasdaq composite index: It is the market capitalisation weightages of prices for stocks listed in the NASDAQ stock market. · Sand P 500 Index: It is made of 500 biggest publicly traded companies in the US. · Hang Seng Index: Index of largest companies of Hong Kong stock market. · Nikkei 225: Stock market index for Tokyo Stock Exchange. · KosP1: Index of all common shares on the Korean Stock Exchanges. · Dow Jones Euro Stoxx 50: It is a weighted index of 50 Eurozone stocks, (Europe). |
12.3 Trading Procedure On a Stock Exchange
The steps of the trading procedure on a stock exchange are as follow
12.3.1 Selection of a Broker
The first step is to select a registered broker or sub-broker and enter into an agreement with him. The investor has to sign a broker-client agreement and a client registration form before placing an order to buy or sell securities.
He also has to provide the following information
The broker then opens a trading account in the client’s name.
12.3.2 Opening Demat Account With Depository
12.3.3 Placing the Order
12.3.4 Executing the Order
12.3.5 Settlement
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Dematerialisation and Depositories
Depository service is the name of that mechanism which makes online trading of shares possible. Sometimes, securities held by the investor in the physical form are cancelled and the investor is given an electronic entry or number so that she/he can hold it as an electronic balance in an account. This process of holding securities in an electronic form is called dematerialisation popularly known as D’mat. For this, the investor has to open a demat account with an organisation called a depository. |
12.4 Major India Stock Exchanges
Some of the main Indian stock exchanges are described below
12.4.1 National Stock Exchange of India (NSEI)
It is the latest, most modern and technology driven exchange. It was incorporated in 1992 and began working in 1994. It provides countrywide online trading facility, electronic clearing and settlement system. It was set-up by leading financial institutions, banks and insurance companies.
Objectives of NSEI
Following are the main objectives of NSEI
12.4.2 Over The Counter Exchange of India (OTCEI)
It is a company incorporated under the Companies Act, 1956. It was set-up to provide small and medium companies, an access to the capital market for raising finance. In the OTC exchange, trading takes place when a buyer or seller walks up to an OTCEI counter, taps on the computer screen, find quotes and affects a purchase or sale.
Advantages of OTCEI
The advantages of OTCEI are as follow
12.4.3 Bombay Stock Exchange Ltd (BSE)
BSE was established in 1875 as the Native Share and Stock Brokers Associaton in Bombay as Asia’s first stock exchange. Today, it is known as Bombay Stock Exchange (BSE). BSE was set-up as a corporate entity with a broad shareholder base. It has a global reach with customers all over the world. It has also established a capital market institute called the BSE Institute Ltd, which provides education on financial markets.
Objectives of BSE
The objectives of BSE are as follow
12.5 Securities Exchange Board of India (SEBI)
SEBI was established in 1988 as interim administrative body to promote orderly and healthy growth of securities market and for investor protection. If got statutory status on 30 January, 1992.
It involves regulating the business in stock exchanges supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters etc as well as prohibiting unfair trade practices in the securities market.
Objectives of SEBI
The main objectives of SEBI are as follow
Functions of SEBI
Functions performed by SEBI are categorised as:
(i) Regulatory Functions
(a) Registration of brokers, sub-brokers and other players in the market.
(b) Registration of collective investment schemes and mutual funds.
(c) Regulation of brokers, underwriters, merchant bankers and the business in stock exchanges.
(d) Regulation of takeover bids by companies.
(e) Levying fee or other charges for carrying out the purposes of the act.
(f) Performing and exercising such powers under Securities Contract Act, as may be delegated by the Government of India.
(ii) Development Functions
(a) Training of intermediaries of the securities market.
(b) Conducting research and publishing information useful for market participants.
(c) Undertaking measures to develop the capital markets.
(iii) Protective Functions
(a) Prohibition of fraudulent and unfair trade practices.
(b) Controlling insider trading and imposing penalties for such practices.
(c) Undertaking steps for investor protection.
(d) Promotion of fair practices and code of conduct in securities market.
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