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
- Mobilisation of savings to the most productive uses
- Facilitating price discovery
- Providing liquidity to financial assets
- 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
- Providing Liquidity and Marketability to Existing Securities
- Pricing of securities
- Safety of transactions
- Contributes to economic growth
- Spreading of equity cult
- Providing scope for speculation
Trading Procedure
- Selection of Broker
- Opening Demat Account
- Placing the order
- Match the share and best price
- Executing order
- Issue of contract note
- Delivery of share and making payment
- Settlement cycle
- Pay out day
- Delivery of share
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.