Also, we are going to give you study notes, video lectures and also PDF of handly lecture notes. Firstly, I want to share with you what are all the topics which we are going to cover in this article. Also, you can watch all the chapters videos on my YouTube channel by clicking here.
Topics covered in financial markets are:-
- Meaning and concept of financial markets
- Money & capital market
- Money market instrument
- Primary & secondary market
- Primary market
- A secondary (stock) market
- The trading procedure of stock exchange
- Security and exchange board of India
- Case study of the financial market
Meaning And Concept of Financial Markets
Financial markets are a link between savers (surplus) and borrowers(deficit). Financial markets/Investors/Banks are called surplus unit because they can provide money whereas business enterprise is called deficit unit because they need money.
Functions of financial markets
1) Mobilisation of saving & channeling them into most productive use.
2) Facilitate price discovery – Demand and supply of financial assets in financial security.
3) Providing liquidity to financial market – Surplus units can give cash easily in the financial market. In financial markets, we can get cash easily.
4) Reduce cost of transactions – Financial markets reduces time effort and cost because everything is online today.
Money & Capital market
Money Market Instruments
1) Call money(Interbank) –
- Maturity is from 1 to 15 days.
- Usually, the bank uses call money.
- Banks borrow money from each other via call money.
- The rate at which money is borrowed is called call rate.
- When the call rate increases other financial (security) assets decreases and vice versa. (Inverse relationship)
2) Treasury bills (Zero coupon bonds or T-bills)
- The maturity period is from 14 to 365 days.
- Issued by RBI on behalf of the Government of India.
- Issue at discount & redeem at par. (Issue at price lower than their face value and repay at par.)
3) Commercial bills –
- The maturity period is generally 90 days.
- Bill of exchange need for meeting short term working requirements of the business.
- Movement it accepted by the third party (usually commercial banks) BoE(Bill of Exchange) becomes commercial bills.
4) Commercial paper –
- The maturity period is from 3 to 12 months.
- Introduced the first time in India in the year 1990.
- Used to meet floatation costs.
- Used by large & financially sound companies, which are with a good reputation and credit awareness.
- It has now secured a promissory rate.
5) Certificate of Deposits –
- MaturityMaturity period is from 91 days to 1 year.
- Issued by commercial banks and development banks.
- Banks issue it to meet the high demand for credit in tight liquidity.
Primary & Secondary Market
It is a platform where sale of new/first time security takes place. Methods of floatation (Issuing) of security –
1) Offer via prospectus – It is a document in which the purpose of the fund, company financial performance is written. This company shares its shares to the public directly.
2) Offer for sale – In this, the company does not share its shares with the public directly because more formalities are involved, they are shared with intermediates and the intermediates then share to the public.
3) Private placement – In this, the company does not share its shares to the public, they are shared with intermediates and the intermediates then share to only special clients like LIC, etc.
It is also cost-saving because many expenses are minimized like manager fees, agents commission, Underwriters expenses, etc. Small & new companies generally use this method.
4) Right Issue (For existing companies) – It is the act passed in 1956 in which it is cleared that, If the company is going to issue the new shares then first it asks old shareholders if they want to buy then the company has to sell to them if they neglect then only the company can sell its shares to its new shareholders (outsiders).
5) E – IPO(Electronic initial public offers) – In this company shares its shares to the public directly via electronic communication or online through the Internet.
The secondary market is also known as stock exchange. It is a platform where the buy and sell existing/second-hand security takes place.
Functions of secondary market are:-
1) Providing liquidity & marketability to existing securities. It provides a platform for sale and purchase of security (shares, bonds, debentures).
2) Prices of security – Fixed security price to shares & debentures according to demand and supply.
3) Contributing to economic growth – It also helps in utilising money via the allocation function.
4) Safety of transaction – All the transactions are electronic and done through a secured portal known as the SEBI.
5) Spreading of equity cult – Encourages people to invest in securities by providing better trade practices & education of investment.
6) Providing scope for speculation – It also keep an eye on all transactions under healthy supervision.
Trading And Procedure of Stock Exchange
It involves the following number of steps –
Step 1 :- Selecting the broker.
Step 2 :- Opening the demat account.
Step 3 :- Placing the order.
Step 4 :- Connecting to the stock exchange.
Step 5 :- Executing the order.
Step 6 :- Issuing of contract note.
Step 7 :- Delivery of cash/securities (Pay-in day).
Step 8 :- Settlement before T+2.
Step 9 :- Delivery of security/cash (Pay-out day).
Step 10 :- Delivery of security in demat form.
Depository is an organisation which keeps the reservoir of securities in electronic form through depository participants (DPs). The securities belong to the investors who use the services of depository participants to get their securities updated in their account with the Depository in the demat form.
The two depository built in India are :-
- National Securities Depository Ltd. (NSDL)
- Central Depository Service Ltd. (CSDL)
Conversion oof physical form of securities into electronic form and saving them in the Depository in the form of demat account through the involvement of Depository participants (DP).
Dematerialisation process :-
Step 1 :- Filling of demat request form and giving physical share certificates to the Depository participant (DP).
Step 2 :- DP contract note the Depository and update them about the request of the investor.
Step 3 :- DP submits all these documents to the Registrar of the concerned issuer company.
Step 4 :- Registrar confirms the request.
Step 5 :- Registrar de materialises the certificates and documents.
Step 6 :- Registrar after having done the updation of certificates informs the Depository.
Step 7 :- Depository does updation of its accounts and informs DP.
Step 8 :- Finally demat account is updated by the DP.
Its full form is the Security Exchange Board of India. It deals with all the activities taking place in the stock exchange. In 1988 the SEBI is introduced having some control over stock market transactions which is ineffective.
Then in Sept. Act 1992, it is appointed as a stationary body having full control on stock market transactions and also get separate legal existence. It is also known as ‘watchdog’ of stock exchange because it keeps an eye on all the transactions taking place.
SEBI is the regulator for the securities market in India owned by Government of India.
Objectives of SEBI
1) Prevention on various malpractices like price rigging, etc.
2) Maintains code of conduct of investors brokers and issuers.
3) Protecting the valuable investors.
4) Developing the stock exchange by maintaining & improving aspects connected with them.
Functions of SEBI
1) Development function –
- Development of capital market by considering the improvement of all possible aspects connected by it.
- Doing timely research & undertaking to publish the outcomes of research as & when required.
- Training the intermediates (like brokers) who acts as a link between investors and issuers.
2) Regulating function –
- Compulsory registration of brokers & sub-brokers.
- Registration and regulation of mutual funds.
- Regulation of taking overbids.
- Conducting inspections, inquiries & audits of the stock exchange.
- Charges fees whenever required.
- Regulations of stockbrokers and Underwriters.
3) Protective function –
- Protecting the interests of the investors.
- Checking malpractices like insider trading, price rigging, etc.
- Taking care of the entire code of conduct in the securities market.
- Promotion of ethical and fair practices.
- Imposing penalties whenever required.
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