Summary and Notes of Ch 10 Financial Markets| Class 12th Business Studies
Financial Market means the market that creates and exchanges financial assets.
Functions of Financial Market
• Mobilisation of savings and channeling them into the most Productive Uses- It helps to transfer of savings from savers to investors.
• Facilitating Price Discovery- The forces of demand and supply established a price of any commodity or services in the market.
• Providing Liquidity to financial Assets- Financial Markets provides easy sale and purchase of financial assets.
• Reducing the cost of transactions- Provides information related to financial securities.
Financial market is divided into two categories
Money Market
It is a market for a short term funds which deals in monetary assets whose period of maturity is up to one year. The major participants in the market are the Reserve Bank of India, Commercial Banks, Non- Banking Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.
Money Market Instruments
• Treasury Bill: It is a short-term instrument issued by the Reserve Bank of India on behalf of the central government to meets its short- term requirement of funds. Its maturing period cannot be more than one year. Treasury Bills are also known as Zero Coupon Bond.
• Commercial Paper: Commercial Papers are short- term unsecured promissory notes which are issued by large and creditworthy companies to raise short-term funds at lower rates of interests than market rates. It is sold at discount and redeemed at par. It usually has a maturity period of 15 days to one year.
• Call Money: Call Money is short term finance repayable on demand. The maturity period of the loan is between one and 15 days.
• Certificate of Deposit: Certificates of deposit are unsecured, negotiable, short-term instruments in bearer form issued by commercial banks and development financial institutions.
• Commercial Bill: Commercial Bill is a short-term negotiable, self- liquidating instrument, bill of exchange used to finance the working capital requirements of business firms.
Capital Market
It refers to that market where long term funds, both debt and equity are raised and invested. Share and debenture are main securities in this market. An ideal capital market is one where finance is available at reasonable cost.
The capital market can be divided into two parts:
Primary market: Primary market refers to that market in which securities are sold for the first time for collecting long-term capital. Primary market is also known as the New Issues Market and also deals with new securities being issued for the first time. A company can raise capital through the primary markets in the form of equity shares, preference shares, debentures, loans and deposits.
Secondary market: The secondary market is a market for purchase and sale of existing securities in open market without intervention of the issuing company. The chief purpose of the secondary market is to create liquidity in securities.
Distinction between Capital Market and Money Market
| Basis for comparison | Money Market | Capital Market |
| Meaning | Deals with short-term securities. | Deals with long-term securities. |
| Instruments | The main instruments are T-bills, trade bills reports, commercial paper and certificate. | The main instruments are equity shares, debentures, bonds, preference shares etc. |
| Participants | The participants in the Money market are large undertaken by institutional participants such as the RBI, Banks, financial institutions and finance companies. | The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors. |
| Duration | Within a year. | More than a year. |
| Liquidity | High | Low |
| Safety | Low risky | Comparatively high |
| Expected return | Less | Comparatively High |
Stock Exchange
It is institution which provides a platform for buying and selling of existing securities. It helps companies to raise finance, provide liquidity and safety of investment to the investors and enhance the credit worthiness of individual companies.
Definition of stock exchange according to securities contracts (Regulation) Act 1956
Stock exchange means anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities.
Functions of a Stock Exchange
• Providing Liquidity and Marketability to Existing Securities.
• Share prices are determined by the forces of demand and supply.
• The investing public gets a safe and fair deal because its dealings are well defined according to the existing legal framework.
• A stock exchange provides liquidity to securities. This gives the investor a double benefit –first, the benefit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the existing market price at any time.
• The stock exchange ensuring a wider ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investment.
• When securities are purchase with a view to getting profit as a result of change in their market price, it is called speculation.
Trading
All buying and selling of shares and debentures are done through a computer terminal. Trading in securities is done through brokers who are member of stock exchange. Every broker has to have access to a computer terminal that is connected to the main stock exchange.
Advantage of electronic trading systems
It ensures transparency, increases efficiency of information, increases the efficiency of operations.
Steps in the Trading and settlement Procedure
• If an investors wishes to buy or sell any security he has to firs registered as a broker or sub-broker, then enter in to an agreement. This required information is mandatory for him
PAN number, Date of birth and address, Educational qualification and occupation, residential status, Bank account details, Depository account details, name of any other broker with whom registered, Client code number in the client registration form.
• The investors has to open a ‘demat’ account or ‘beneficial owner’ account.
• The investor places an order with the broker.
• The broker will go online and match the share and best prices available.
• When final deal is done, the broker will issue a trade confirmation slip to the investor and contract note.
• After receiving a contract note, the investor has to deliver the shares sold or pay cash for the shares bought.
Dematerialisation and Depositories
Dematerialisation: Dematerialisation is the process of converting a share certificate from its physical form to electronic form.
Depository: The investor has to open a Demat Account with an organisation called a depository.
Rematerialisation: Physical shares can be converted into electronic form or electronic holdings can be reconverted into physical certificates called rematerialisation.
NSE (National Stock Exchange of India)
NSE was incorporated in 1992 and was recognised as a stock exchange in April 1993 but started operations in 1994. The NSE was set up by leading financial institutions, banks, insurance companies and other financial intermediaries.
Objective of NSE
• Establishing a nationwide trading facility for all types of securities.
• Ensuring equal access to investors all over the country through an appropriate communication network.
• Providing a fair, efficient and transparent securities market using electronic trading system.
• Enabling shorter settlement cycles and book entry settlements.
• Meeting international benchmarks and standards.
Market Segments of NSE
The Exchange provides trading in the following two segments:
• Whole sale Debt Market Segment: This segment provides a trading platform for a wide range of fixed income securities that include central government securities, treasury bills, and State development loans, bonds issued by public sector undertakings, floating rate bonds, zero coupon bonds, index bonds, commercial paper, certificate of deposit, corporate debentures and mutual funds.
• Capital Market Segment: The capital Market segment of NSE provides an efficient and transparent platform for trading in equity, preference, debentures, exchange traded funds as well as retail Government Securities.
BSE (Bombay Stock Exchange Ltd)
BSE Ltd was established in 1875 and was Asia’s first stock Exchange. It was granted permanent recognition under the securities contract Act, 1956. It has contributed to the growth of the corporate sector by providing a platform for raising capital.
Objective of BSE
• To provide fair and transparent market for trading in equity, debt instruments, derivatives, and
mutual funds.
• Trading platform for equities of small and medium enterprises.
• To conform to international standards.
• Instead of trading BSE also provides risk management, clearing, settlement, market data and education.
SEBI (Securities and Exchanging Board of India)
SEBI was established in 1988 and was given statutory status through an Act in 1992. The SEBI was set-up to protect the interests of investors, development and regulation of securities market
Purpose and role of SEBI
• The main purpose of SEBI is to create an environment to facilitate efficient mobilisation and allocation of resources through the securities markets.
• It also aims to stimulate competition and encourage innovation.
The environment aims at meeting the needs of the three groups which basically constitute the market:-
→ To the issuers- It aims to provide a market place in which they can confidently look forward to raising finances they need in an easy, fair and efficient manner.
→ To the investors- It should provide protection of their rights and interest.
→ To the intermediaries-It should offer a competitive, professionalised and expanding market with adequate and efficient infrastructure so that they are able to render better service to the investors and issuers.
Objective of SEBI
• The objective of SEBI is to regulate stock exchanges and securities industry to promote their orderly functioning.
• To protect the rights and interest of investors means protecting investors from wrong information, particularly individual investor and educate them regarding rules and regulations.
• To prevents investors from insider trading and malpractices.
• To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc.
Functions of SEBI
The function of the SEBI can be divided into three parts:
Regulatory Functions
• To register brokers, sub-brokers, transfer agents and other players in the market.
• To register collective investment schemes and mutual Funds.
• Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers.
• Regulation of takeover bids by companies.
Development functions
• Providing training of intermediaries of the securities market and conducting research and publishing information useful to all market participants.
• Help in developing capital markets by adapting a flexible approach.
Protective Functions
• Taking steps for investor protection and controlling insider trading.
• Promotion of fair practices and code of conduct in securities market and prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations, price rigging etc.
The organisation Structure of SEBI
SEBI has decided its activity into five operational departments. Each department is headed by an executive director. The office of SEBI is situated at Mumbai with its regional offices at Kolkata, Delhi and Chennai. The SEBI also formed two advisory committee primary market advisory committee and Secondary market advisory. These committees consist of the market players, the investors associations recognised by the SEBI.
The objectives of the two committees are as follows:
• To advise SEBI on matters relating to the regulation of intermediaries for ensuring investors protection.
• To advise SEBI related to primary market development.
• To advise SEBI on disclosure requirements for companies.
• To advise the board in matters relating to the development and regulation of the secondary market in the country.
• To advise for changes in legal framework to introduce simplification and transparency in the primary market.
NCERT Solutions of Chapter 10 Financial Markets