FINANCIAL MARKET

INTRO:

1. Financial market is a market which facilitates creation of assets and exchange of

securities to provide short, medium and long-term business finance.
2. It mobilizes funds between savers and investors.
3. It locates funds into the most productive investment opportunities.

FUNCTIONS OF FINANCIAL MARKET:

1. Mobilization of savings and channelizing them into the most productive uses: Financial
markets help people to invest their savings in various financial instruments and earn
income and capital appreciation
2. Facilitating price discovery: The interaction between the households and business firms
helps to establish a prices of financial securities
3. Providing liquidity to financial assets: Financial assets can be easily converted into cash
as financial markets provide facility of purchase and sale of financial assets.
4. Reducing the cost of transactions: Financial markets provide information about the
financial securities and save time, effort, and money of both the buyers and sellers of
a financial asset.

TYPES OF FINANCIAL MARKETS:

1. Money market: short term market (up to one year)
2. Capital market: medium or long term market (more than one year)

MONEY MARKET:

1. Lending and borrowing of cash for short period of time

2. Sale and purchase of securities which gets redeem within one year
3. Not a fixed geographical area
4. Institutions involved in money market are R.B.I., commercial banks, LIC, etc.

INSTRUMENTS OF MONEY MARKET:

1. Call Money: money borrowed on demand for short period on call—interbank call
money—one day to fifteen days
2. Treasury Bills (T. Bills): issued by R.B.I. on behalf of the Govt. of India—freely
transferable—safest investment—14 to 365 days—also known as Zero Coupon Bonds
3. Commercial Bills: bill drawn by one firm to another firm—used for credit purchase
and sale—90 days
4. Commercial paper (C.P.): unsecured promissory note—issued by public or private
companies—also known as bridge financing—only companies having good reputation
—15 days
5. Certificate of deposits (C.D.): only bank can issue C.D.—deposits kept by companies
and institutions—91 days to one year
CAPITAL MARKET:
 1.
Long term investment
2.
Creates link between the savings and investment process.
3.
Helps in using different intermediaries such as brokers, underwriters.
4.
Capital market offers attractive opportunities to those who can invest more and
more in capital market
5. Government rules and regulations
TYPES OF CAPITAL MARKET:
A. PRIMARY MARKET: known as new issue market—new securities issued for
first time—directly goes to investors—utilizes these funds as investment.
Methods of floatation of securities in primary market:
a. Public issue through prospectus: The public companies issue prospectus to raise funds
from the public by issuing financial instruments like shares, debentures, etc., through an
advertisement in the newspaper and magazines.
b. Offer for sale: Public companies offer securities for sale to the brokers or issuing houses
at an agreed price and in turn, these intermediaries resell them to the investors.
c. Private placement: Private placement means issue and allotment of shares to the
selected individuals and companies privately.
d. Rights issue: Rights issue refers to issue of new shares to the existing shareholders in
accordance to the terms and conditions of the company.
e. e-IPOs: A company can raise funds by issuing capital to the public through the online
system of stock exchange and this is called an initial public offer (IPO).

B. SECONDARY MARKET: known as stock exchange—sale and purchase of

previously issued or secondhand securities.

STOCK EXCHANGE:
According to Securities Contract (Regulation) Act 1956, defines stock
exchange as a body of individuals, whether incorporated or not, constituted for the purpose
of assisting, regulating or controlling the business of buying, selling or dealing in
securities.

FUNCTIONS:

1. Economic barometer: also known as pulse of economy—rise or fall in share

price indicates recession or boom cycle of economy.
2. Pricing of securities: reputed firms will have higher value of shares as there is
more demand for it.
3. Safety of transactions: securities of firms having goodwill only included in
trade list as it ensures safety.
4. Contributions to economic growth: process of disinvestment or reinvestment
helps in economic growth.
5. Spreading of equity cult: encouraging people to invest in equity with better
trading practices.
6. Providing scope for speculation: to ensure healthy guessworking about
securities.
7. Liquidity: securities can be converted into cash easily and also long- term
investments can be converted into medium or short- term investments.
 8. Better allocation of capital: stock exchange facilitates allocation of investor’s
fund to profitable channels.
9. Promotes the habits of savings and investments: encourage people to invest
in corporate sector’s securities rather than investing in other assets such as
gold, silver, etc.

TRADING PROCEDURE ON A STOCK EXCHANGE:

1. Selection of broker: A first step, an investor needs to select a broker who is registered
with the SEBI and sign a trading agreement with him/her.
2. Opening demat account with depository: A second step, demat or dematerialized
account is an account which an Indian citizen must open with depository participant
to trade in listed securities in electronic form.
3. Placing the order: As next step, the investor must place an order with the appointed
broker to trade in securities with clear instructions regarding number and price at
which securities must be traded.
4. Executing order: On receipt of order, the broker goes online and executes the order
matching the price and securities needed by the client. On completion of the
transaction, he/she issues a contract note to the investor giving all the details of the
transaction.
5. Settlement cycles: actual transfer of securities, last stage of trading done by broker on
behalf of their clients, there are two types of settlements:-
a. On the spot settlement:
Settlement done immediately,
Follows T+2 rolling settlement,
i.e., if any trade takes place on Monday, then it gets settled on Wednesday.
b. Forward settlement:
Settlement will take place on some future date,
And follows T+5 or T+7 rolling settlement,
i.e., if any trade takes place on Monday, then it gets settled either on next Monday
or Wednesday.
NOTE: all trading in stock exchange takes place between 9:15 a.m. to 3:30 p.m.
from Monday to Friday.

DEMATERIALISATION AND DEPOSITORIES:

All trading in securities is now done through computer terminals. Since all systems are
computerised, buying and selling of securities are settled through an electronic book entry
form. This is mainly done to eliminate the problems like theft, fake/forged transfers, transfer
delay and paper work associated with share certificates or debentures held in physical form.
Dematerialisation is a process where securities held by investor in physical form cancelled
and the investor is given an electronic entry or number so that he/she can hold an electronic
balance in account. So, in short, dematerialisation refers to holding securities in electronic
form.
For this, investor has to open a demat Account. With an organisation called depository.
Now even all Initial Public Offers (IPO) are issued in dematerialisation form and more than
90% of the turnover is settled by delivery in Demat form.
Securities Exchange Board of India (SEBI) has made it mandatory into trade in demits form
only for certain selected securities:
Benefits of Dematerialisation
1. Holding shares in demat form is very convenient as it is just like a bank account. Physical
shares can be converted into electronic form or even electronic form can be converted back to
physical certificate, i.e., Dematerialisation.
2. These demat securities can even be pledged or mortgaged to get loans.
3. There is no danger of loss, theft or forgery of share certificates.
4. Reduces paper work.
5. It is broker's responsibility to credit the correct number of shares in the investor's account.
6. Securities of different companies can be held in a single demat account.
WORKING OF DEMAT SYSTEM:
1. Before opening a demat account with depositories the investor has to select DP. Depository
participant. DP is the agent of Depository. DP may be a bank, broker or a financial service
company.
2. Filling of an account opening form, along with PAN card details, photograph, etc. 3. The
physical share certificates to be given to DP along with a request form for dematerialisation.
4. If shares are applied in IPO, then simple details of demit A/c and DP to be given allotment
would automatically be credited to demit account.
5. If shares are to be sold through broker, the DP must be instructed to debit the account with
the number of shares sold.
6. The broker then gives instructions to his DP for delivery of the shares to the stock
exchange.
7. The broker than receives the payment and pays the person for the shares sold. 8. All these
transactions are to be completed, within 2 days, i.e., delivery of shares. Payment received
from buyers as settlement period is T+2 days since April 2003.
CONSTITUTES OF DEPOSITORIES SYSTEM:
Depository system consists of:
i) The Depository:
ii) The Depository participants (DP):
Stock exchange indices
i) Sensex: This is a Bombay Stock Exchange Index. It is calculated by taking prices
of 30 stocks across key sector of BSE.
ii) Nifty: This is a National Stock Exchange Index. It is calculated by taking prices
of 50% key stocks listed in NSEI.

Other benefits of on line stock exchange

Demutualisation: Earlier on the intermediaries, i.e., brokers used to own, control and
manage the stock exchanges. This ownership and management of stock exchange by brokers
often led to conflict of interests between brokers and their clients. To solve this problem
government did demutualisation of stock exchange.
Demutualisation refers to separation of ownership and control of stock exchange from the
trading rights of members. Through demutualisation there is reduction of chances of brokers
using stock exchange for personal gains.
SEBI
Securities and Exchange Board of India (SEBI) was set up in 1988 to regulate the functions
of securities market. SEBI promotes orderly and healthy development in the stock market but
initially SEBI was not able to exercise complete control over the stock market transactions. It
was left as a watch dog to observe the activities but was found ineffective in regulating and
controlling them. As a result, in May 1992, SEBI was granted legal status. SEBI is a body
corporate having a separate legal existence and perpetual succession.
Reasons for establishment of SEBI:
With the growth in the dealings of stock markets, lot of malpractices also started in s markets
such as price rigging, unofficial premium on new issue, delay in delivery of shares, viola of
rules and regulations of stock exchange and listing requirements. Due to these malpractices
customers started losing confidence and faith in the stock exchange. So government of India
to set up an agency or regulatory body known as Securities and Exchange Board of India
(SEBI).
Purpose and role of SEBI:
SEBI was set up with the main purpose of keeping a check on malpractices and protect the
interest of investors. It was set up to meet the needs of three groups:
1. Issuers. For issuers it provides a market place in which they can raise finance fairly and
easily.
2. Investors. For investors it provides protection and supply of accurate and correct
information.
3. Intermediaries. For intermediaries it provides a competitive professional market.
Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives
of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self-regulation of
business and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters,
etc.
FUNCTIONS OF SEBI
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are:
1. Protective functions
2. Developmental functions
3. Regulatory functions
1. Protective Functions. These functions are performed by SEBI to protect the interest of
Investor and provide safety of investment. As protective functions SEBI performs following
functions:
(i) Check a price rigging. Price rigging refers to manipulating the prices of securities with
the main objective of inflating or depressing the market price of securities. SEBI prohibits
such practice because this can defraud and cheat the investors.
(ii) It prohibits insider trading. Insider is any person connected with the company such as
directors, promoters, etc. These insiders have sensitive information which affects the prices of
the securities. This information is not available to people at large but the insiders get this
privileged information by working inside the company and if they use this information to
make profit, then it is known as insider trading, e.g., the directors of a company may know
that company will issue Bonus shares to its shareholders at the end of year and they purchase
shares from market to make profit with bonus issue. This is known as insider trading. SEBI
keeps a strict check when insiders are buying securities of the company and takes strict action
on insider trading.
(iii) SEBI prohibits fraudulent and unfair trade practices. SEBI does not allow the
companies to make misleading statements which are likely to induce the sale or purchase of
securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities
of various companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following
steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in mid-term.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine
and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to
market prices.
2. Developmental Functions. These functions are performed by the SEBI to promote and
develop activities in stock exchange and increase the business in stock exchange. Under
developmental categories following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions. These functions are performed by SEBI to regulate the b in stock
exchange. To regulate the activities of stock exchange following functions are performed:
(1) SEBI has framed rules and regulations and a code of conduct to regulate the
intermediaries performed: such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange in
any manner.
(iv) SEBI registers and regulates the working of mutual funds, etc. (v) SEBI regulates
takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.