Financial Market | Functions | Types | Stock Exchange | Chapter 10 |
Meaning of Financial Market
Financial market refers to the market which creates and exchanges the financial assets. It refers to those institutional arrangements through which the savings, which are generated in the country, are channelised into investments by business, government and industries.
Functions of Financial Market
- Provides Liquidity to Financial Assets: Financial markets provides liquidity to financial instruments providing a ready market which means an investor can invest at any time by purchasing them and can convert them into cash by selling them.
- Facilitate Price Discovery: The price of financial assests and securities in financial market depends upon the demand and supply factor of that asset wherein business firm represents demand side whereas households represent the supply side.
- Mobilise the Savings and Channelise them into most Productive Uses: Financial market helps in converting the savings into investment transferring the savings from savers to investors in the form of investment.
- Reduces the cost of Transaction: Financial markets provide necessary details to buyer and seller which saves time, money and efforts. The financial markets also provide the facility of broker through which an investor and seller can buy and sell the securities at a nominal commission of the service.
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Types of Market
- Money Market: Money market refers to the market where the investments are made in short term securities. These markets have low-risk and short-term debt instruments which are highly liquid in nature. These markets do not have any physical place, the transactions are conducted over telephone or internet.
Features of Money Market
- The securities are more liquid in nature.
- There is no need of broker which makes it more cost friendly.
- The market deals in short-term financial assets.
- The transaction are completed more speedily.
Instruments of Money Market
- Treasury Bill: Treasury bill is a type of bill which is issued by Reserve Bank of India (RBI) on behalf of government. The maturity period of these bills is 14, 91, 182, 364 days and are purchased in the multiple of₹25000/- These bills are also known as Zero Rated Bonds as no interest is paid on these bonds and are purchased by the commercial banks, Non-banking Financial Institutes. These bills are highly liquid in nature for RBI is ever-ready to buy them.
- Commercial Paper: Commercial Papers are short-term unsecured promissory notes which are issued by large companies for the purpose of bridge financing. Bridge Financing is a term which is used to meet the flotation cost during issuing shares. These papers are negotiable owing to which they can be transferred to some other person also and have a maturity period of 15 days to 1 year with the minimum value of ₹5 lakh/-
- Commercial Bill: These bills are used to finance the requirement of working capital or sales of a business firm and are easily transferable. These bills can be easily discounted from the bank before the due date and have a maturity period of 90 days.
- Call Money: It is also known as Call loans which are taken by commercial bank from another commercial banks to maintain the minimum limit of cash balance which is prescribed by RBI. The maturity period of these bills is from 1 to 15 days and the rate of interest which is charged on it is known as Call Rate.
- Certificate of Deposits (CD): It is a negotiable instrument which is issued by the scheduled commercial banks and other financing institutes to companies, corporates etc. The minimum face value of these bills is ₹5 lakh/- and the minimum amount is ₹25 lakh/-
- Capital Market: Capital market is that type of market wherein investments are made in long-term securities. These markets fulfill the need of long-term finance to various sectors of economy which are raised and invested in both debt and equity.
Features of Capital Market
- It deals in long-term securities.
- It helps in maintaining balance between the supply and demand sides.
- Through this, long-term financial needs are satisfied.
- It helps in Capital formation process.
Types of Capital Market
- Primary Market: It refers to that market wherein the securities are sold for the first time for the purpose of setting-up new projects, expansion etc. Primary market is also known as New Issue Market (NIM) which is used by both the types of companies i.e. newly established and the existing ones to raise capital.
Features of Primary Market
- The shares are issued for the first time, also known as Initial public offer (IPO)
- Comes before secondary market
- It does not have particular place whereby one can buy new shares.
Methods of Flotation of IPO
- Offering through prospectus, it is also known as public issue
- Offer for sale
- Private Placement
- Right Issue
- Electronic Initial Public Offer (e-IPOs)
- Secondary Market: It refers the type of market wherein the existing securities are traded. Under this, the securities are sold by the investor without intervening the company and these transactions are generally done through recognised stock exchange.
Features of Secondary Market
- It helps in creating liquidity.
- The secondary market has a fixed location from where a buyer or seller can buy or sell securities.
- Helps in increasing the investment through fluctuations in the investments.
- Comes after primary market.
A stock exchange refers to that institute which provides platform to buyer and seller to buy and sell existing securities to facilitate exchange i.e. money into shares or debentures or shares and debentures into money. It exhibits index which can help to check the overall economic development in the country.
Features of Stock Exchange
- Stock market is an organised and recognised market.
- It helps in dealing in the shares of listed companies.
- An individual or institution can only deal in shares through an authorised agent called broker.
Functions of Stock Exchange
- It provides liquidity to various securities in the market.
- It contributes in the economic development of the country by showing the ratio of top 30 or 50 companies.
- It makes transaction safer by providing regulations, laws and by-laws.
- It helps in determining the price of the securities in the market.
- It ensures wider ownership of shares which helps in spreading equity cult.
Trading Procedure on a Stock Exchange
- Selection of Broker: First of all a broker is selected, who should be an authorised member of stock exchange, in order to trade in the stock market.
- Opening of Demat Account: After selecting broker, DEMAT account is opened in which the quantity of share which are bought.
- Placing the Order: In this, the buyer or seller specifies the quantity and type of share which are to be bought or sold by him.
- Executing the Order: Under this, the broker buys or sells the securities from the DEMAT account as per the instructions of investor.
- Settlement: This is the final stage in which the transfer takes place from the DEMAT account of seller to the DEMAT account of buyer. The settlement transactions are of two types; on the spots settlement, in which the rolling period is of two days and forward settlement, in which the rolling period may vary from five or more than that days.
Securities and Exchange Board of India (SEBI)
SEBI is the institution which was established by the government of India on 12th April, 1988 to promote the orderly and healthy growth of securities market and to protect the interest of the investor. It is a statutory body which is governed by the SEBI Act, 1992 and got statutory status on 30th January, 1992.
Objectives of SEBI
- It helps to regulate the stock exchange and market to promote orderly function.
- It helps to protect the rights and interest of the investors by guiding and educating them time to time.
- It prevents the malpractice of internal or insider trading.
- It regulates and develops a code of conduct for market intermediaries like brokers, merchant bankers etc. by keeping eye on their activities.
Functions of SEBI
- Protective Functions:
- It prohibits the unfair trade practices in the secondary market.
- It prohibits insider trading.
- It provides education to the investor and promote code of conduct for brokers.
- Regulatory Functions:
- It regulates the market intermediaries such as brokers, sub brokers, portfolio manager etc.
- It regulates the companies which are listed on stock market.
- It regulates the credit rating agencies and venture capital firms.
- It regulates the collective investment schemes such as mutual funds.
- Development Functions:
- It imparts training for intermediaries.
- It develops capital market.
- It promotes fair practices through code of conduct.
- It conducts research and publishes the information which is useful for all the parties who are operating in the capital market.
Difference Between Capital Market and Money Market
||It refers to that type of market in which investments are made in long-term securities.
||It refers to that market in which the investments are made in short term securities.
||Equity shares, preference shares, debentures, bonds etc.
||Zero coupon bonds, commercial bills, commercial papers, certificate of deposit etc.
||The maturity period is more than one year.
||The maturity period is less than one year.
||The minimum value that can be invested is as low as ₹10/-
||The minimum value that can be invested is ₹10 crore.
||The instruments in this market generally yields higher rate of interest.
||The instruments in this market yields lower rate of interest.
Difference Between Primary Market and Secondary Market
||It refers to that market in which the securities are sold for the first time for the purpose of setting-up new projects etc.
||It refers to that type of market in which the existing securities are traded.
||In this market, Securities are issued for the first time.
||In this market, the securities are already issued in some previous years.
||Under this, an investor can only purchase securities.
||Under this, an investor can buy or sell securities.
||This type of market does not have a specified place.
||This type of market has a specified place
|Determination of Price
||The price is determined by the issuing company.
||He price is determined by the market forces of demand and supply.
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