Financial Market Keywords and Brief Notes

Financial Market

  • A market for the creation and exchange of financial assets.
  • Link between savers(investors) and borrowers(business).
  • Two Segments: Money Market, Capital Market.

Functions of Financial Market

  1. Mobilisation of savings to the most productive uses
  2. Facilitating price discovery
  3. Providing liquidity to financial assets
  4. Reducing the cost of transactions

Money Market

  • Deals in short term securities maturing in less than one year.
  • Treasury bills, Commercial papers, Certificates of Deposits, Call Money and Commercial bill.
  • Low to moderate risk.

Capital market

  • Deals in long term securities maturing in more than one year
  • Equity shares, Preference shares, Debentures etc.
  • High risk.
  • Two Types: Primary and Secondary

Distinction between Capital Market and Money Market

Sr.No. Basis Capital Market Money Market
1 Participants Financial institutions, banks, corporate entities, foreign investors and public. RBI, banks, financial institutions and finance companies.
2 Instruments Equity shares, debentures, bonds, preference shares etc.

 

T-bills, trade bills reports, commercial paper and certificates of deposit.
3 Investment Outlay Small/Small unit value Huge/Large unit value
4 Duration More than one year/long term One day to one year/short term
5 Liquidity Low High
6 Safety/Risk High risk, low safety Low risk, more safety

 Primary Market

  • Also known as New Issue Market.

Secondary Market

  • It is a market for sale and purchase of existing securities.

 Difference between Primary Market and secondary Market

Sr.No. Basis Primary Market Secondary Market
1 Other name New Issue Market Stock exchange
2 New/Existing Issue New issue or new companies Existing securities only
3 Company involvement Yes, Directly or indirectly Not in any case
4 Capital formation Directly promoted Indirectly promoted
5 Buying/Selling Buying only Both, buying and selling
6 Price fixation Management Demand and supply forces
7 Geographical Location Not fixed At specified places

Stock Exchange

  • It is an institution which provides a platform for buying and selling of existing securities.

Functions of Stock Exchange

  1. Providing Liquidity and Marketability to Existing Securities
  2. Pricing of securities
  3. Safety of transactions
  4. Contributes to economic growth
  5. Spreading of equity cult
  6. Providing scope for speculation

Trading Procedure

  1. Selection of Broker
  2. Opening Demat Account
  3. Placing the order
  4. Match the share and best price
  5. Executing order
  6. Issue of contract note
  7. Delivery of share and making payment
  8. Settlement cycle
  9. Pay out day
  10. Delivery of share

Financial Market Keywords and Brief Notes

Dematerialistaion

  • The process of holding securities in an electronic form.
  • All trading now done through computer terminals.
  • Electronic book entry settlement of buying and selling.
  • Investor to open Demat account with a depository.
  • All Initial Public Offers (IPOs) are issued in dematerialisation form these days.
  • Benefits: Eliminates problems like theft, fake/forged transfers, transfer delays and paperwork associated.

Depository

  • Depository is like a bank and keeps securities like Stock, Debentures, Mutual Fund etc. in electronic form on behalf of the investor.

SEBI – Securities Exchange Board of India

  • Formed to control malpractices.
  • Check on malpractices.
  • Marketplace for issuers.
  • Protection and fair information to investors.

Purpose of SEBI

  • To the issuers - to provide a market place.
  • To the investors - protection of their rights.
  • To the intermediaries - competitive, professionalized and expanding market.

Objectives of SEBI

  • To regulate stock exchanges and the securities industry.
  • To protect the rights and interests of investors.
  • To prevent trading malpractices.
  • To regulate and develop a code of conduct.

Functions of SEBI:Regulatory Functions

  • Registration of brokers and sub-brokers etc.
  • Registration of collective investment schemes.
  • Regulation of stock brokers etc.
  • Regulation of takeover bids by companies.
  • Calling for information for inspection/enquiries/audits.
  • Levying fee or other charges.

Development Functions

  • Training of intermediaries.
  • Conducting research and publishing information.
  • To develop the capital markets.

Protective Functions

  • Prohibition of fraudulent and unfair trade practices.
  • Controlling insider trading.
  • Steps for investor protection.
  • Promotion of fair practices/code of conduct.

Financial Market Keywords and Brief Notes

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