UDIT WADHWA CLASSES
CHAPTER-10 FINANCIAL MARKET
CLASS-XII BUSINESS STUDIES
Financial Market:- is a market where financial assets are created or exchanged. It
mobilizes funds between savers and the investors thus, act as a link between two.
It allocates or directs the funds available for investment into most productive
investment opportunity. This is called allocative function.
Financial assets are created when a business enterprise raised funds through fresh
or initial issue of shares and debentures.
Financial assets are exchanged when a business enterprise purchases or sells
existing financial assets.
Functions of Financial Market
1. Mobilisation of Savings and Channelizing them into the most Productive Uses:- A
financial market facilitates the transfer of savings from savers to investors. It gives
savers the choice of different investments and thus helps to channelizing surplus
funds into the most productive use.
2. Facilitating Price Discovery:-In the financial market, the households are suppliers
of funds and business firms represent the demand. The interaction between them
helps to establish a price for the financial asset which is being traded in that
particular market.
3. Providing Liquidity to Financial Assets: Financial markets facilitate easy purchase
and sale of financial assets. In doing so they provide liquidity to financial assets, so
that they can be easily converted into cash whenever required.
4. Reducing the Cost of Transactions:- Financial markets provide valuable
information about securities being traded in the market. It helps to save time,
effort and money that both buyers and sellers of a financial asset would have to
otherwise spend to try and find each other. The financial market is thus, a
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common platform where buyers and sellers can meet for fulfilment of their
individual needs.
Types of Financial
Market
Capital Money
Market Market
Primary Secondary
Market Market
1. Money Market:- It is a type of financial market where the financial instruments
with maturity period of less than one year are traded.
2. Capital Market:- It is a type of Financial market where the financial instrument
with maturity period of more than one year are traded.
Primary Capital Market:-also known as new issues market deals in financial
instruments being issued for the first time. Major financial instruments used to
raise finance are equity shares, preference shares, debentures, loans and deposits.
Secondary Capital Market:- It deals with sale and purchase of financial
instruments which already exist in the financial market. It is Known as Stock
market or Stock Exchange.
Difference Between Money Market and Capital Market
Basis Money Market Capital Market
Meaning Money Market meets the short- Capital Market meets the medium
term financial Requirement of term and long term financial
business enterprises. requirement of business enterprises.
Maturity Less than one year More than one Year
Financial Treasury Bill, Commercial Paper, Equity Shares, Preference Shares,
Instruments Call Money, Certificate of Deposits. Debentures, Bonds etc.
Investment Requires Huge Investment Requires Less Investment
Outlay
Liquidity Highly Liquid Less Liquid
Risk Less Risky More Risky
Return Lesser Return Higher Return
Difference Between Primary Market and Secondary Market
Basis Primary Market Secondary Market
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Nature of There is sale of securities by new There is trading of existing shares
Securities companies or further (new issues of only.
securities by existing companies to
investors)
Process of Securities are sold by the company Ownership of existing securities is
Transactions to the investor directly (or through exchanged between investors. The
an intermediary). company is not involved at all.
Capital The flow of funds is from savers to Enhances encashability (liquidity)
Formation investors, i.e. the primary market of shares, i.e. the secondary
directly promotes capital formation market indirectly promotes capital
formation.
Trading of Only buying of securities takes place Both the buying and the selling of
securities in the primary market, securities securities can take place on the
cannot be sold there. stock exchange.
Price Prices are determined and decided Prices are determined by demand
Determination by the management of the company and supply for the security.
Location There is no fixed geographical Located at specified places.
location
Stock Exchange (The Secondary Capital Market)
A stock exchange is an institution which provides a platform for buying and selling of
existing securities. Stock exchanges help companies raise finance, provide liquidity
and safety of investment to the investors and enhance the credit worthiness of
individual companies.
According to Securities Contracts (Regulation) Act 1956, stock exchange means any
body 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 Stock Exchange
1. Providing Liquidity and Marketability to Existing Securities:-The basic function of
a stock exchange is the creation of a continuous market where securities are
bought and sold. It gives investors the chance to disinvest and reinvest. This
provides both liquidity and easy marketability to already existing securities in the
market.
2. Pricing of Securities:- Share prices on a stock exchange are determined by the
forces of demand and supply. A stock exchange is a mechanism of constant
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UDIT WADHWA CLASSES
valuation through which the prices of securities are determined. Such a valuation
provides important instant information to both buyers and sellers in the market.
3. Safety of Transaction:-The membership of a stock exchange is well- regulated and
its dealings are well defined according to the existing legal framework. This
ensures that the investing public gets a safe and fair deal on the market.
4. Contributes to Economic Growth:-A stock exchange is a market in which existing
securities are resold or traded. Through this process of disinvestment and
reinvestment savings get channelized into their most productive investment
avenues. This leads to capital formation and economic growth.
5. Spreading of Equity Cult:-The stock exchange can play a vitaole in ensuring wider
share ownership by regulating new issues, better trading practices and taking
effective steps in educating the public about investments.
6. Providing Scope for Speculation:-The stock exchange provides sufficient scope
within the provisions of law for speculative activity in a restricted and controlled
manner. It is generally accepted that a certain degree of healthy speculation is
necessary to ensure liquidity and price continuity in the stock market.
Procedure to Trade Securities in a Stock Exchange
1. Selection of a Broker:-If an investor wishes to buy or sell any security he has to
first approach a registered broker or sub-broker and enter into an agreement
with him. The investor has to sign a broker-client agreement and a client
registration form before placing an order to buy or sell securities. He has also to
provide certain other details and information.
These include: • PAN number (This is mandatory) • Date of birth and address. •
Educational qualification and occupation. • Residential status (Indian/ NRI). •
Bank account details. • Depository account details. • Name of any other broker
with whom registered. • Client code number in the client registration form.
2. Opening Demat Account:-The investor has to open a ‘demat’ account or
‘beneficial owner’ (BO) account with a depository participant (DP) for holding and
transferring securities in the demat form. He will also have to open a bank
account for cash transactions in the securities market.
3. Placing the Order:-The investor then places an order with the broker to buy or
sell shares. Clear instructions have to be given about the number of shares and
the price at which the shares should be bought or sold.
4. Executing the Order:-The broker then will go on-line and connect to the main
stock exchange and match the share and best price available. When the shares
can be bought or sold at the price mentioned, it will be communicated to the
broker’s terminal and the order will be executed electronically. The broker will
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issue a trade confirmation slip to the investor. After the trade has been executed,
within 24 hours the broker issues a Contract Note. This note contains details of
the number of shares bought or sold, the price, the date and time of deal, and the
brokerage charges. This is an important document as it is legally enforceable and
helps to settle disputes/claims between the investor and the broker.
5. Settlement:-The investor has to deliver the shares sold or pay cash for the shares
bought. This should be done immediately after receiving the contract note or
before the day when the broker shall make payment or delivery of shares to the
exchange. This is called the pay-in day. Cash is paid or securities are delivered on
pay-in day, which is before the T+2 day as the deal has to be settled and finalised
on the T+2 day. The exchange will deliver the share or make payment to the other
broker. This is called the pay-out day. The broker then has to make payment to
the investor within 24 hours of the pay-out day since he has already received
payment from the exchange.
Dematerialisation
Dematerialisation is a process through which physical securities such as share
certificates and other documents are converted into electronic format and held in a
Demat Account. A depository is responsible for holding the securities of a
shareholder in electronic form.
Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India was established by the Government of
India on 12 April 1988 as an interim administrative body to promote orderly and
healthy growth of securities market and for investor protection. It was to
function under the overall administrative control of the Ministry of Finance of the
Government of India. The SEBI was given a statutory status on 30 January 1992
through an ordinance. The ordinance was later replaced by an Act of Parliament
known as the Securities and Exchange Board of India Act, 1992.
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Purpose and Role of SEBI
1. 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.
2. To the investors:- it should provide protection of their rights and interests
through adequate, accurate and authentic information and disclosure of
information on a continuous basis.
3. 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.
Objectives of SEBI
To regulate stock exchanges and the securities industry to promote their orderly
functioning.
To protect the rights and interests of investors, particularly individual investors
and to guide and educate them.
To prevent trading malpractices and achieve a balance between self-regulation by
the securities industry and its statutory regulation.
To regulate and develop a code of conduct and fair practices by intermediaries like
brokers, merchant bankers etc., with a view to making them competitive and
professional.
Functions of SEBI
Regulatory Functions
1. Registration of brokers and subbrokers and other players in the market.
2. Registration of collective investment schemes and Mutual Funds.
3. Regulation of stock brokers, portfolio exchanges, underwriters and merchant
bankers and the business in stock exchanges and any other securities market.
4. Regulation of takeover bids by companies.
5. Calling for information by undertaking inspection, conducting enquiries and
audits of stock exchanges and intermediaries.
6. Levying fee or other charges for carrying out the purposes of the Act.
7. Performing and exercising such power under Securities Contracts (Regulation) Act
1956, as may be delegated by the Government of India.
Development Functions
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1. Training of intermediaries of the securities market.
2. Conducting research and publishing information useful to all market participants.
3. Undertaking measures to develop the capital markets by adapting a flexible
approach.
4. Educating Investors.
Protective Functions
1. Prohibition of fraudulent and unfair trade practices like making misleading
statements, manipulations, price rigging etc.
2. Controlling insider trading and imposing penalties for such practices.
3. Undertaking steps for investor protection.
4. Promotion of fair practices and code of conduct in securities market.
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