Key Points
Key Points: Concept of Financial Market
- Finance is managed as personal, corporate and public finance.
- Financial markets are a key part of the Indian financial system.
- Financial market deals in assets like bonds, stocks and government securities.
- It links surplus investors with deficit business enterprises.
- Main functions: channelising savings, price determination, liquidity and low transaction cost.
- Financial markets are divided into money market and capital market based on maturity.
Key Points: Money Market
- Money market is for short-term funds and near money instruments.
- All money market instruments have maturity of one year or less.
- Instruments are highly liquid, less risky and easily tradable.
- Key participants include RBI, banks, NBFCs, governments, big companies and mutual funds.
- Main instruments: Treasury bills, call/notice money, commercial papers, commercial bills and certificates of deposit.
- Call rate affects demand for other money market instruments through an inverse relationship.
Key Points: Capital Market
- Capital market is for long‑term funds (debt and equity).
- Supports investment and economic growth.
- Demand: agriculture, trade, industry.
- Supply: individual savers, corporates, banks, insurance companies, special institutions.
- Institutions and instruments: development banks, commercial banks, stock exchanges, shares, debentures, bonds, mutual funds, public deposits.
Key Points: Primary Market
- Primary market deals with new securities issued for the first time.
- Main investors: banks, financial institutions, insurance companies, mutual funds and individuals.
- Funds are raised for new projects, expansion, diversification, modification, mergers and takeovers.
- Offer through prospectus is the most popular method for public companies in the primary market.
- Offer for sale uses intermediaries like issuing houses and stock brokers.
- Private placement, rights issue and E-IPOs are additional methods of flotation of securities.
Key Points: Secondary Market/Stock Exchange
- Secondary market is the stock exchange / stock market.
- It deals in existing or second-hand securities.
- Stock exchange is a platform for trading securities.
- Companies Act 1850 was introduced to promote investment in corporate securities.
- First stock exchange: Bombay, 1875, later called BSE.
- Other exchanges came up in Ahmedabad, Calcutta and Madras.
- Post-1991, Indian secondary market has a three-tier structure: Regional Stock Exchanges, NSE and OTCEI.
Distinction Between Capital Market and Money Market
| Basis | Capital Market | Money Market |
|---|---|---|
| Time span | Long- and medium-term securities with maturity more than one year. | Short-term instruments with maturity up to one year. |
| Liquidity | Tradable on stock exchanges; less liquid than money market instruments. | Highly liquid due to an active ready market. |
| Returns | Higher potential returns over a longer period. | Lower expected returns because of shorter maturity. |
| Instruments | Equity shares, preference shares, bonds, debentures. | Commercial papers, treasury bills, certificates of deposit. |
| Risk | Relatively risky for both return and principal repayment. | Relatively safe, issued for short duration by sound entities. |
Distinction between Primary and Secondary Market
| Basis | Primary Market | Secondary Market |
|---|---|---|
| Meaning | Securities are sold for the first time. | Sale and purchase of existing (second-hand) securities. |
| Types of Securities | Sale of new securities. | Sale and purchase of existing/second-hand securities. |
| Issued by | Securities and bonds directly issued by companies. | Securities and bonds transferred between investors only. |
| Capital Formation | Directly contributes to company capital; funds move from surplus to deficit units. | Indirectly contributes; exchange of funds between surplus units only. |
| Entry / Listing | Companies enter to raise capital for operations. | Only securities of listed companies are bought and sold. |
| Geographical Location | No fixed geographical location; banks, institutions, foreign investors contribute. | Fixed geographical location and fixed working hours. |
| Price | Fixed by management of the issuing company. | Determined by demand and supply in the stock exchange market. |
Key Points: Functions of Stock Exchange
- Stock exchange provides liquidity and marketability by allowing easy buying and selling of securities.
- Security prices are determined by the forces of demand and supply.
- It provides a fair, safe and legally regulated platform for trading.
- It promotes economic growth by directing savings into productive investments.
- It encourages investment in securities, leading to the spreading of equity cult.
- It provides scope for healthy speculation, helping maintain market activity.
- Overall, a stock exchange makes trading in securities easy, safe and efficient.
Key Points: Trading Procedure of Stock Exchange
- Trading in securities begins by selecting an authorised stock broker.
- The investor must open a Demat account for electronic holding and trading of securities.
- Buy or sell orders are placed through the broker or electronically.
- The broker executes the order and provides a contract note as proof of the transaction.
- Settlement involves the transfer of securities and funds between the buyer and seller.
- Trading is carried out in an organised, electronic and regulated manner through authorised intermediaries.
Key Points: Depository Services
- Technology-driven storage system for securities in electronic form.
- Works on behalf of the investor.
- Allows deposit, withdrawal and sale of shares any time as per investor’s instructions.
- Avoids paperwork related to share certificates and transfer forms.
- Increases speed and efficiency of trading and settlement of securities.
- Constituents of the Depository System: Depository, depository participants, demat account, issuing company and investor.
Key Points: Demat System
- Demat account is a dematerialised account for electronic holding of securities.
- Dematerialisation converts physical certificates into electronic forms for easy management and access.
- Demat speeds up the share certificate process and stores all securities digitally.
- All investments in shares, government securities, ETFs, bonds and mutual funds are held in one Demat account.
- Demat enabled digitisation of Indian stock trading and is governed by SEBI.
- Electronic holding reduces theft, risks, malpractices and damage.
- Demat gives benefits like no stamp duty, faster transfers, correct deliveries, convenient nomination and transmission, no TDS and regular statements.
Key Points: Securities and Exchange Board of India (SEBI)
- SEBI was established in 1988 and became a statutory body in 1992 under the SEBI Act, 1992.
- SEBI regulates, supervises and promotes the securities market while protecting investors' interests.
- The main objectives of SEBI are regulation, investor protection, prevention of malpractices and enforcement of a code of conduct.
- SEBI performs three major functions: Protective, Developmental and Regulatory.
- The major intermediaries regulated by SEBI are stock exchanges, stock brokers, merchant bankers, depositories, credit rating agencies and mutual funds.
- The two major depositories in India are NSDL and CDSL, while the major stock exchanges are BSE and NSE.
- The leading credit rating agencies are CRISIL and ICRA, and the oldest mutual fund in India is UTI.
Important Questions [18]
- Which of the following statements is incorrect?
- Differentiate between ‘primary market’ and ‘secondary market’ on any five basis.
- Differentiate between the money market and the capital market.
- An Investor Wanted to Incest Rs. 20,000 in Treasury Bills for a Period of 91 Days. When He Approached the Reserve Bank of India for this Purpose He Came to Know that It Was Not Possible.
- Explain 'Private Placement' and 'Rights Issue' as methods of floatation of new issues in the primary market.
- State Any Four Methods of Floatation of New Issues in the Primary Market.
- 'Gujarat Textiles Ltd.' needs to raise a fund of ₹80 crores. It cannot afford the cost of a public issue, so it was decided to allot its equity shares to institutional investors like LIC.
- Distinguish between the following: Primary market and Secondary market
- Statement - I: Capital market instruments are considered riskier both with respect to returns and principal repayment.
- State any five regulatory functions of the Securities and Exchange Board of India.
- Mr. Vikas Mehra Was the Chairman of 'Ibm Bank'. the Bank Was Earning Good Profits. Shareholders Were Happy as the Bank Was Paying Regular Dividends. the Market Price of Their Shares Was Also Steadily Rising.
- Mr. Aditya Gupta Was the Chairman of ‘Vandan Bank’. the Bank Was Earning Good Profits. Shareholders Were Happy as the Bank Was Paying Regular Dividends. the Market Price of Their Shares Was Also Steadily Rising.
- State the protective functions of the Securities and Exchange Board of India.
- State any three Development functions of Securities and Exchange Board of India.
- Mr. Sanjay Nehra Was the Chairman of 'Taran Bank.' the Bank Was Earning Good Profits. Shareholders Were Happy as the Bank Was Paying Regular Dividends. the Market Price of Their Shares Was Also Steadily Rising.
- State any three objectives of the Securities Exchange Board of India.
- 'Due to various malpractices and multiplied investors grievances the Govt. of India decided to set up a separate regulatory body to protect the interest of investors
- Which of the following is not a function of Securities and Exchange Board of India (SEBI)?
Concepts [12]
- Concept of Financial Market
- Money Market
- Capital Market
- Primary Market
- Secondary Market/Stock Exchange
- Distinction Between Capital Market and Money Market
- Distinction between Primary and Secondary Market
- Functions of Stock Exchange
- Trading Procedure of Stock Exchange
- Depository Services
- Demat System
- Securities and Exchange Board of India (SEBI)
