Financial Markets-Notes


Chapter 10: Notes on Financial Markets

Financial market is a link between savers and the borrowers; a financial market helps to establish a link between savers and the investors by mobilising funds between them.

Functions of Financial Market

  1. Mobilization of savings: It is an allocative function of financial market that it facilitates transfer of people's saving to investors.
  2. Price fixation: price is determined from the forces of demand and supply. The interaction between demand and supply helps to establish a price for financial asset.
  3. Provides liquidity to financial assets: shareholders can sell their share easily through mechanism of financial market.
  4. Reduce the cost of transactions: provides valuable information to buyers and sellers of financial assets & helps in saving time money and efforts.

Classification of market

  1. Capital market: refers to all organization institutions & instruments that provide long term funds. The instruments used in capital markets are equity, preference shares and debentures.
  2. Primary Market: primary market is the market, in which a security is sold for the first time. The securities issued are equity shares, preference shares, & Debentures.
    Methods of issuing Securities in Primary Market:
    1. Initial public offer: If a company wants to issue capital to the public through the online system of the stock exchange has to enter in an agreement with a stock exchange, this is called an initial public offer.
    2. Offer through prospectus: This involves inviting subscription from the public through issue of prospectus. A prospectus is a document inviting deposits from the public for the subscription of any shares or debentures.
    3. Offer for sale: The securities are not issued directly to the public but are offered to the public for sale through stock brokers.
    4. Private placement: Under this method securities are allotted to institutional investors and some selected individuals.
    5. Right Issue: this is a special facility given to existing shareholders to subscribe to a new issue of shares according to the terms & conditions of the company.
  3. Secondary Market: The stock exchange is known as secondary market for securities; in this market existing securities can be traded.
  4. Money market: money market is a market for lending & borrowing of short term funds. It is the major source of finance for working capital. It includes institutes like RBI, commercial banks, etc.
    Instruments of Money Market
    1. Call money: is used by banks, insurance company & financial companies. Under this bank lends cash for one or two days to other bank that are in shortage of cash. It is repayable on demand with maturity period of 1 to 15 days.
    2. Treasury Bills: are issued by RBI on behalf of the govt. of India for a period of 14 to 364 days. These bills are very popular as no interest is paid on these bills. Issued at a minimum amount of Rs. 25000 and are also called Zero coupon Bond.
    3. Trade Bills: are drawn by one business firm on other business firm, normal duration is 90 days. Such bills are freely transferable and can be easily discounted from banks.
    4. Commercial paper: is issued by the public/private sector companies with good reputation. It is an unsecured promissory note issued with fixed maturity period up to 12 months. It provides short term funds for seasonal & working capital needs.
    5. Certificate of Deposits: are unsecured, short term instruments issued by commercial banks & financial institutions during periods of tight liquidity when deposits growth of banks is slow & demand of credit is high.

Functions of Stock Exchange

  1. Ready marketability
  2. Valuation of Securities
  3. Capital Formation
  4. Safety of Investment
  5. Issue of New Securities
  6. Control on Company Management
Basis of difference NSEI OTCEI
Size Paid up capital is Rs. 3 crores or more Paid up capital Rs. 30 lakhs or more
Securities traded Equity shares, Debentures, treasury bills, etc. Equity shares, Debentures, etc.
Objectives Establishing single stock exchange at national level Providing listing facility to small companies.

Securities & Exchange Board of India (SEBI): is a corporate body having separate legal existence & perpetual succession.

Objectives of SEBI

  1. Protection of Investors
  2. Steady Flow of Savings
  3. Control over Brokers
  4. Transparency in transactions
  5. Fair Practices by Issuers

Functions of SEBI

  1. Regulating functions
  2. Developmental functions
  3. Protective functions