FINANCIAL MARKET Financial Markets—Concept, functions and types Money market and its instruments Capital market and its types (primary and secondary), methods of floatation in the primary market B Stock Exchange—Functions and trading procedure = Securities and Exchange Board of India (SEBI)— objectives and functions yaaa OL wns CONCEPT AND NATURE between between the Savers and borrowers) This market transfers the money OF capi > have surplus money to those who are in need of investment. Generally, thefinvestors are called ae units and business enterprises are called deficit uni So financial market transfers money supply from surplus units to deficit units. Financial market acts as a link between surplus and deficit units and brings together the borrowers and lenders. wR THOU fvere Hide who Woe dchidd Fy Banks 5 Business Firm (Deficit) Financial C = System 4 Financial 7 Markets. Household Sector (Surplus used) There are mainly two ways through which funds can be allocated: (a) Via bank ~ (b) Financial markets. The households who are the surplus units may Keep their savings in banks, they may buy securities from capital market. The banks and financial market both in turn lend the " funds to business firm which is called deficit unit. Bank and financial market are competitor of each otherFinancial market is a market for the ion and exchange of financial assets\432 I Part: 8 Business Finance and Marketing, 10.1.1 Functions of Financial Markets iy Financial markets perform following four AZ” Mobilisation of savings and channelising them in between savers and invest important functions: to th ‘rinancial markets tra markets act as a 7 savers to most appropriate investment OPPOFTIP TS ye demand an f 27 Facilitate price discovery. Price of anything Apo fy nancial markets | Bemand and supply of financ! the prices of various finané AE Provide liquidity to financial assets. In £20 and sold easily so financial market provides = ES" TT “4p-Reduce the cost of transaction. Financ cial regarding price, availability and cost 0 inane Fe i ig pend much on geting tie informetion = in financial markets. In financial market Jatform to convert securiti Classification of Financial Market 1s of financial market: (a) Capital ‘There are two segment: 4 Warket for qui Shen Term ‘Seconda Norket Debt | fear Leas (Stock-Exchange) Equity Functions of Financial Market (i) Moving saving of household to corporate sector. (i). Demand and supply of financial market fix the price. (ii) By selling securities in financial market any time investors can conve’ cash. (iv) Financial market provide ready information so no money is spent by inve: information. he most productive USES. Financ 5 financial securities can be boughy ‘et provides complete information securities. So investors anj readily available market (b) Money market. rt their investment .d supply factor, help in deciding in cash, 10. .stors to coleChapter: 10 Financial Market | 433 tis a market for creation and ex change of financial ass : i ; ets, It helps t ith the investors and direct available funds into their most eres ty. It also facilitates easy purchase and sale of financial assets jnancial marke! ink the savers Wi jnvestment opportunil through stock exchange. state two functions of financial market performed in above case. arket help to save time, efforts and money that both buyers and sellers ts would have to otherwise spend to know each other the function of ferred in above para is Financial of: financial asse financial market re! (@) Facilitate Price discovery (b) provide liquidity to financial assets (c) Reduce the cost of transaction (d) Mobilisation of saving and channelising them into most productive use. , (Answers at Page no. 471) TTP TAI AU, Oe 10.2 MONEY MARKET — cues oy news market for short term funds meant for use for a period of upto one . Transactions of money ket is the source of finance for working capil Tof time and also sale and purchase hin one year period. fixed geographical area bu! 1 organisations and #1 debts. The common institutes are Reserve E nk of India, LIC, GIC, UTI. ete. Many of these institutions \or Money market is @ _ Generally, money mar] Et include lending and borrowin ‘Of cash fora short perio’ of securities having one year term Or which gets redeemed (paid back) wit it it constitutes al Money market is not a al with short-ter1 institutions which de other Commercial Banks. suate Bank of India, deaion telephone and fax only, Features of Money Market: _AMarket for short term. “Z.No fixed geographical location. 3. Major institutions involved in money Common instruments of money market ar Commercial bill, etc. 10.2.1 Instruments of Money Market ments of money market are: or lent on demand for a short period which is generally one day. Sundays and other holidays are excluded for this purpose. Mostly Banks use call money. When one bank faces temporary shortage of cash then the bank with surplus cash vo days. Call money is called interbank call money , lends to bank in shortage for one oF NY z Wer Sd On poner jon shod pes wud oly 4 dan - Tak tn be \ lau. ~ fe nk Won dubia fy -Uat Bonk with Wanglns ia, ow vA et Tee ee to tn Coda cal A You Wwe mercial Banks, LIC, GIC, etc. market are R.B.L., Com Treasury bill, CP, CD. e Call money, ‘The common instru 1. Call Money. The money borrowed434 | Part: B Business Finance and Marketing TO BPO CUT AGL SP OA AtwwGHa. High Liquiclcby market, But even other organisations such as insurance companies, mutual fund companj etc. also deal with call money. It is a market over the telephone. The maturity periods pra ind varies from one day to fifteen days and its liquidity ig fe money are extremely short a next to cash. Most of the time banks require call money to meet the minimum requirement of Ca, Reserve Ratio (RR). The interest paid on call money is called call rate. Itis very volatile rate which varies from day to day and sometimes from hour to hour. [here is an inverse relation between the rate of interest of call money and other securities as when rate of interest of ca money increases the other securities become cheap) Treasury Bills (T. Bills).(Ireasury bills are issued by Reserve Bank of India. on behalf of the Government of India. These bills enable government to get short term borrowings as these Government ¢ oS _® bills are sold to banks and general public) ‘These bills are negotiable instruments and are > ? freely transferable. These are issued at a discount. These are considered safest investment as these are issued by R.B.I. The maturity period of Treasury Bills varies from 14 to. 364 days Por g a » Treasury Bills are also called Zero Coupon Bonds. They are issued ata price lower than their r, These are available for minimum amount of %25,000 and in Ajo’ y\ face value and repaid at pa way multiples thereof. ‘ , Example: Suppose an investor purchases a 3 months treasury bill with a face value of ill get 2,00,000 and %2,00,000 for 21,90,000. By holding the bill till maturity period he wi difference between the bill amount and amount paid to purchase the bill is the interest received by him. , . \s or accommodation bills are bills drawn by one business firm 3. Commercial Bills{ Trade bill on anotl@if These are common instruments used in credit purchase and sale, These have short ly 90 days and can be discounted with bank even before the by term maturity period general! "maturity period. These are negotiable instruments and can be easily transferred. The drawee of the bill honours the bill on due date.(A trade bill is nothing but written acknowledgement of debt where the maker or drawer instructs oF directs the payee or drawee to make payment within a fix period of tine Whe drawee accepts the bill and becomes liable to make payment ondue dite] on bubdge Foard 4. Commercial Paper (C.P.). The commercial paper was introduced in India for the first time in 1990. It is anlunsecured promissory notd issued by public or private sector companies with a fixed maturity period which varies from 15 days to one year. Since commercial papers are unsecured so these can be issued by companies having good reputation and creditworthiness. ‘The commercial banks and mutual funds are the main investors of commercial papers. Funds raised through commercial paper are used to meet the floatation cost. This is known as bridge financing. For example firm wants to raise long term funds to buy a new office building and machinery. To raise long term funds by issue of shares, debentures the company will have to incur floatation cost such as brokerage, commission, printing of prospectus etc. ‘The firm can meet this cost by issue of commercial papers.‘Main purpose of issuing commercial papers are (1) Meeti fon cost (2 fands for seasonal and working capital need. leeting floatation cost (2) Gertificate of Deposits (C.D.)3Tt is a time or deposit which can be sold in the secondary a cet. Only a bank can issue C.D. T are itle. Ie is al marl ly a.bank can issue C.D. It is a bearer certificate or document of ttle. Its also a egotiable instrument and can be transferred easily. C.D. is issued by banks against the deposits kept by companies and institutions. The time period of C.D. ranges from 9} wsyear These can be Issued to indivi nies during period of one year, These can De issued to iadividials, corporations and companies during period of ght liquidity when the deposit growth of bank is slow but the demand for credit is high. Difference between Certificate of Deposit [CD] and Fixed Deposit [FD] Certificate of Deposit [CD] Fixed Deposit/Time Deposit [FD] 7__| obs are freely negotiable. Fs are not freely negotiable. 7 | ep can be issued fora period of 81 days to 1 year. | FDs may be issued for 9 minimum period of 14 cays ‘and maximum there is no limit. are 1 435 4 .diary. Under this method the intermediaries i rom interme ediaries issue se 1) oe ngs UTI, LIC, General Insurance ete aie © | uti |e ier is a Goat saving method ment method is a ‘cost savin ‘method as company is saved from the manager fees, agents’ commission, listing of company’s name G ect Jace! and new companies prefer private placement as they cannot ‘ f ynderwriler fees, d tc. Small | ot! {ech Be blc issue. | fo" (For Existing Companies). This is the issue of new shares to existing led right issue because it is the pre-emptive right of shareholders that the new issue before subscribing to outsiders. Each shareholder to the new shares in the proportion of shares he already holds. for companies under Companies’ Act 1956. The stock exchange isting companies to g0 for new issue without giving pre-emptive rights .e if new issue is directly issued to new subscribers then the ital and control of company, i.e. Jose their share in cap! right issue is compulsory for shareholders may : re-emptive or existiN ster thei? equity. To stop this the p' i yo ee ic Initial Public Offer): It is the new method of issuing securities Jf, es0s- (Electron ry of stock exchange. In this company has to appoint registered Hi of accepting applications and placing orders. The company hange other than 4 throug a the purp c nc py oe a ayo apply for listing of its securities 0” any exc rth f | ees it has offered its securities earlier. The manager coordinates the activities 7 cs ss s Ei meh various intermediaries connected with the issue. suseundary Market (Stock Exchange) market is the market for thefale and purchase of previously isued.orsecond thesecondary 4 securities) | in secondary market securities are no? directly issued by the company to investors. The ‘eeutities are sold by existing investors to other investors. Sometimes the investor is in need of he could not get directly from to buy the shares of the company as. tin secondary market and exchange securities for cash ‘onpany. Then both the investors can meet Biot intermediary called broker. ‘Market and Secondary Market i Difference between Primary Basis Primary Market ‘Secondary Market 7 i ‘ i 5 Tprsat | Theres sale of new secures Itis the market for existing or second hand securities. Ieoued 5 ty | inprimary market securities are directly | Securities are transferred between issued by companies. investors only. Copal Primary market cont Farag, | macy maker conibtesdrecty for | Secondary ‘market contributes indirectly for ation as funds are transferred | capital formation as funds are excha from surplus uni aa its to deficit units between surplus units only.440 1 Part: B Busin 1e85 Finance and Marketing All companies enter the primary market to ‘aise capital for their operations. ‘Only listed companies’ cecurities a ought and sold in secondary market, | —| 5. | Geographical | There ie no fixed geographical area for | There ina fixed geographical area and 1 Location primary market, All the institutions, banks, | working hours foreign investors, etc. constitute primary | market. i i ities are fired by the Geile ri rities are fixed by the Prices of securities are vie rw fact etme | Geran and sat of a " exchange market. Difference between Capital Market and Money Market it loney Market S.Nod Basis Capital Market 1 = Participants. ‘The participants in capital market are financial institutions, banks, public and private companies, foreign investors and ordinary retail investors from public. The participants of money market are financial institutions, banks, public and private companies but foreign and ordinary fetail investors do not participate in money market. ‘The capital market deals in medium and Money market deals with short term Duration i Jong term securities. securities having maximum tenure of year. instruments | The common instruments of capital The common instruments of money market Inarket are equity shares, debentures, | are treasury bills, trade bills, CD, CP. etc. preference shares, bonds and other innovative securities. investment | The investment in capital market does | The instruments of money market are outlay not require huge financial investment as_| expensive so huge financial investment is the value of securities is generally low, | required. ie, 210 to 7100, | Liquiaity Capital market securities are considered | Money market securities enjoy higher | liquid because of stock exchange but | degree of liquidity | compared to money market instruments | these are less liquid | | Safety The instruments of capital market are | The instruments of money market are safe fiskier in respect to returns as well as | or less risky due to short duration and respect to principal repayment as issuing | soundness of issuers. company may fail Expected etum | The expecied retun is higher in capital| The expected retum of money maetis | ‘market as along with regular dividend or | less due to short duration. interest there are chances of capital gain. ‘Type of capital | Companies approach capital market for | Companies approach money market for fixed capital requirement. ‘working capital requirement. 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