Chapter 10

FINANCI
AL
MARKE
T
 Financial market
It is a market for the creation and exchange
of financial assets such as shares,
debentures, bonds and government
securities

It is a network of institutions which

provide short, medium and long
 Financial market
Financial markets make possible the
transfer of money from the investors to
the entrepreneurial
borrowers

They bring together the lenders of

funds and borrowers of
 Allocation of Funds
Two alternatives through which allocation of
funds can be done – banks and financial
markets

Household savers can deposit their surplus

funds with banks
Banks then lend these funds to business
 Allocation of Funds
Household savers can also invest their
savings in financial market directly by
purchasing shares and debentures offered
by business firms

Both banks and financial markets are

competing financial
 Fu n cti on s of
Financial
M a r ke t
 Functions of Financial Market
1. Mobilize savings
It mobilizes savings and channelize them
into most productive purposes

It offers the investors different investment

avenues and helps to channelize surplus funds
 Functions of Financial Market
2. Price discovery
Price of any product is determined by the
forces of demand and supply

The interaction between investors and

business firms facilitates the price
determination for the financial assets,
which is being traded in a particular
 Functions of Financial Market
3. Providing liquidity
Financial markets provide liquidity to
financial assets as they can be converted
into cash by selling them in the market very
easily
 Functions of Financial Market
4. Reducing cost of transaction
Financial markets provide a common
platform where buyers and sellers meet
and to trade their securities without much
cost and time
 Functions of Financial Market
1. Mobilize savings

2. Price discovery

3. Providing liquidity

4. Reducing cost of transaction

Classification of financial markets
Money
M a r ke t
 Money Market
Money market is the market for short
term funds
Short term funds are meant for a period
of up to one year

Money market is not usually located at a

particular place
It is a term used to describe all
organizations and institutions that deal in
 Money Market
It makes possible the raising of short term
funds for meeting the working capital needs
and temporary deployment of excess funds
to get returns
 Fe a t u r e s
of M o n e y
M a r ke t
 Features of Money Market
1. Participants
RBI, Commercial banks, non-banking
finance companies, State governments,
large corporate houses and mutual funds
 Features of Money Market
2. Instruments
Short term debt instruments are
traded
 Features of Money Market
3. Investment outlay
Huge sums of money is being
transacted
 Features of Money Market
4. Duration
One day to one
year
 Features of Money Market
5. Liquidity
It enjoys high degree of
liquidity
 Features of Money Market
6. Safety
Short term duration ensures grater
safety
 Features of Money Market
7. Location
No physical location, activities
conducted over telephone or
internet
 Features of Money Market
8. Returns
Comparatively less
returns
 Features of Money Market
9. Unsecured
Instruments traded are
unsecured
 Features of Money Market
1. Participants
2. Short term instruments
3. Investment outlay
4. Duration
5. Liquidity
6. Safety
7. Location
8. Returns
9. Unsecured
Capital
M a r ke t
 Capital
M a r ke t
Capital market is an institutional arrangement
by which savings are channelized into
investment avenues

It enables the borrowers to raise funds for their

purpose
Similarly, it gives opportunities to the lenders
to wisely invest their funds
 Capital
M a r ke t
The borrowers raise required funds through
issue of securities like shares, debentures,
bonds etc.

A security means a certificate of title evidencing

investment made in the capital or debt of
any entity
Fe a t u r e s of
C apita l
M a r ke t
Fe a t u r e s of C a p i t a l
M a r ke t
1. Participants
Financial institutions, banks, corporate
entities, foreign investors and
individual investors.
Financial
Foreign Institutions
Banks
Investors

Individual Corporate
Entities
Investors
Fe a t u r e s of C a p i t a l
M a r ke t
2. Instruments
Equity shares, preference shares,
debentures,
bonds etc.
Equity

Shares

Bonds Preference
Shares

Debentures
Fe a t u r e s of C a p i t a l
M a r ke t
3. Small Investment outlay
The value of one unit is Rs.10, Rs. 100 etc.
and they are traded in lot of 1, 5, 50,
100 etc.
Fe a t u r e s of C a p i t a l
M a r ke t
4. Duration
Medium and long
term
Fe a t u r e s of C a p i t a l
M a r ke t
5. Liquidity
High liquidity as they are marketable in
stock exchanges

Shares &
Debentures
Fe a t u r e s of C a p i t a l
M a r ke t
6. High risk
There no is much safety of investment and
returns
Fe a t u r e s of C a p i t a l
M a r ke t
7. Expected Return
Normally the return on investment is higher
than the money market
 Features of Capital Market
1. Participants
2. Instruments
3. Small Investment outlay
4. Duration
5. Liquidity
6. High risk
7. Expected Return
Distinction
between
M o n e y m a r ke t
And
Capital
m a r ke t
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
1. Term

Money C a pi t al
M a r ke t M a r ke t

It is a market for It is for medium

short term and long term
instruments instruments
having a maturity having maturity
period of less period of more
than one year than one year
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
2. Purpose

Money C a pi t al
M a r ke t M a r ke t

It helps to meet
It helps in
the working
meeting fixed
capital needs
capital needs
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
3. Instruments

M o n e y M a r ke t C a pi t al
M a r ke t
The instruments in
money market The instruments
are Bill of are equity
exchange, shares,
treasury bills, preference
certificate of shares,
deposits, debentures,
commercial bonds etc.
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
4. Nature

Money C a pi t al
M a r ke t M a r ke t

It is a It is a retail
wholesale market where
market where the
the instruments
instruments have small
have large face value
face value
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
5. Participants

Money C a pi t al
M a r ke t M a r ke t

Stock
The central bank,
exchanges,
commercial
Merchant banks,
banks and other
Issue houses
financial
and many
institutions take
financial
part in the
intermediaries
market
take part in the
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
6. Support of Secondary Market

Money C a pi t al
M a r ke t M a r ke t

Money market Capital market

instruments do instruments
not have an have both
active primary and
secondary secondary
market markets
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
7. Medium

Money C a pi t al
M a r ke t M a r ke t

Money market
Capital market
transactions
transactions
normally take
normally take
place over
place at stock
telephone and
exchanges
other ways
M o n e y M a r ke t V s . C a p i t a l
M a r ke t
8. Regulations

M o n e y M a r ke t C a pi t al
M a r ke t

The market There is a

regulator is the separate
central bank of regulator in the
the country capital market
In India it is RBI In India it is SEBI
Sl No. Money Market Capital Market

1 Short term instruments Medium & Long term

2 Working capital needs Fixed capital needs

3 Bill of exchange, T-Bills Shares, debentures etc.

etc.
4 Wholesale market Retail market

Banks and
5 Stock exchange, Merchant
financial
banks etc.
institutions are
the participants
6 No support of Both primary and
secondary secondary
market market
7 Take place over Take place at Stock Exchanges
telephone
etc.
 Capital Market

Primary Secondary
Market
Market
Primary Market
 Primary Market
This is the market which deals in new
securities issued by new companies or
existing companies
It is also called New Issue Market (NIM)

If it is issued by new companies it is called Initial

Public Offerings (IPOs) and if it is issued by
existing companies it is called Seasoned Equity
Offerings (SEOs)
 Primary Market
The securities offered are equity shares,
preference shares, debentures, bonds,
innovative types of securities like deep
discount bonds, zero interest bonds etc.

Equity
Zero
Shares Pref
Interest
Shares
Bonds

Deep
Deben
Discount
tures
Bonds
Bonds
Secondary Market
(Stock
Exchange)
 Secondary Market
It is the market for the purchase and sale of
second hand or listed securities

Shares, debentures, bonds etc. which have

already been issued by companies or
government are traded
in this market
 Secondary Market
It consists of buyers and sellers of
securities and brokers as
intermediaries

The investors can buy and sell

securities only through brokers
Secondary markets are also known as
stock exchanges
Comparison between
Primary market and
Secondary market
Primary Market Vs. Secondary Market

1
Primary Market Secondary Market

It deals with It deals with

new existing
securities securities
Primary Market Vs. Secondary Market

2
Primary Market Secondary Market

It provides
Securities are regular and
sold only continuous
once market
Primary Market Vs. Secondary Market

3
Primary Market Secondary Market

It links the Transactions

issuing are made
company and between
investors investors
Primary Market Vs. Secondary Market

4
Primary Market Secondary Market

Investors can
Investors can purchase and
only purchase sell securities
securities
Primary Market Vs. Secondary Market

5
Primary Market Secondary Market

It provides Issuing company

capital to the has no direct
companies role
Primary Market Vs. Secondary Market

6
Primary Market Secondary Market

It does not have It has

any physical physical
existence existence
Primary Market Vs. Secondary Market

7
Primary Market Secondary Market

Prices of Price is based on

securities are demand and
determined by supply of
the company securities
Primary Market Vs. Secondary Market

8
Primary Market Secondary Market

Securities can Only listed

be sold without securities can
listing be traded
 Primary Market Vs. Secondary Market
Sl. Primary Secondary
No
1 New securities Existing securities

2 Sold only once Continuous market

3 Links the company and Between investors

investors
4 Purchase of securities only Purchase and sale of
securities
5 Provides capital to company Company has no direct roll

6 No physical existence It has physical existence

7 Prices determined by It is based on demand

and supply
Company
Stock Exchange
 Stock Exchange
Stock exchange is an organized market
where second hand securities are
bought and sold
 Stock Exchange
Trading in securities takes place inside the
stock exchange at a place known as the
trading ring

Only the members (brokers) are authorized to

trade here
 Stock Exchange
In the traditional method of trading on
the ring, trading actually resembles
an auction

Brokers of intending sellers and buyers will shout

quoting their prices
When the prices coincide, a deal will be struck
 Stock Exchange
Online trading in securities is facilitated
through a computer network wherein one can
buy or sell securities
just by sitting in front of the broker’s
computer

Computer matches the buyer’s quotation and a deal

is struck
 Functions of Stock Exchange
1. Liquidity and marketability to investment
Secondary market provides a continuous
market to the listed securities, so that investors
enjoy liquidity to their investment

They could sell securities with them and buy

 Functions of Stock Exchange
2. Pricing of securities
A security is issued in the market at a price
known as the issue price
Over a period of time, it reaches its true level
through the interaction of the forces of
demand and supply in stock exchange
 Functions of Stock Exchange
3. Safety of transactions
The rules and regulations ensures safety
and fair dealings to investors
 Functions of Stock Exchange
4. Contributes to economic growth
Stock exchanges contribute to economic
growth of the nation through capital
formation
 Functions of Stock Exchange
5. Spreading of equity cult (trend)
Stock exchanges can take effective
measures in educating public about
investments
 Functions of Stock Exchange
6. Providing scope for speculation
A reasonable degree of healthy speculation is
needed to ensure liquidity and price
continuity in securities
 Functions of Stock Exchange
7. Economic barometer

Business conditions like booms and

depressions, important events (both national
and international) etc. will affect the stock
prices

In this sense we can say that the stock

exchange is an economic barometer
 Functions of Stock Exchange
1. Liquidity and marketability to investment
2. Pricing of securities
3. Safety of transactions
4. Contributes to economic growth
5. Spreading of equity cult (trend)
6. Providing scope for speculation
7. Economic barometer
 Trading and
Settlement Procedure
Trading & S e t t l e m e n t
P r oc e d u r e
Online trading – Trading in securities is now
carried out through online, screen based
electronic trading system

Buying and selling of securities are effected

through computer terminal
Trading & S e t t l e m e n t
P r oc e d u r e
Shares can be held either in physical
form or in electronic form

In physical form, a share certificate is issued

and it is a proof of ownership of
securities
The electronic form is called the de-materialized
Trading & S e t t l e m e n t
P r oc e d u r e
When the securities are bought or sold, it
must be settled within 2 days of
the trade

At present T+2 pattern is followed, which

means settlement is made within 2 days
from the date of transaction
This system of settlement is called rolling
settlement
 Steps in Trading and
Settlement Procedure
(Purchase and Sale of securities)
Steps in Trading and Settlement Procedure
1. Selection of a broker.

[Link] a Demat account with the

Depository Participant.

[Link] order for purchaseor sale of

securities with the broker.

4. Execution of order through computer

terminal.
Steps in Trading and Settlement Procedure

[Link] of contract note to the investor,

which contains details regarding name of
security, number of securities bought or
sold, rate at which the deal was made,
brokerage etc.

6. Effecting changes in the Demat account.

7. Making/receiving payment of money.

Advantages of
online
trading
 Advantages of online trading
1. Transparency
It allows the participants to view the
prices of all securities on a real
time basis
 Advantages of online trading
2. Efficient information
Computer screen displays the capital
market developments that influence the share
prices instantly
 Advantages of online trading
3. Efficient operations
It reduces time, cost and
effort
 Advantages of online trading
4. Wide coverage
People from all over the world can participate in
buying and selling of securities by sitting in
front of a computer
 Advantages of online trading
5. Single platform
All trading centres spread across the world is
brought into a single online
platform
 Advantages of Online Trading
1. Transparency
2. Efficient information
3. Efficient operations
4. Wide coverage
5. Single platform
De-materialization
and Depository
Services
 De-materialization and Depository Services

A depository is an organization where the

securities of shareholders are held in
electronic form at the request of the
shareholders through the medium of depository
participant

In the depository system, securities are held in

depository account, which is just like holding
money in a bank account
It is an electronic record of share ownership
De-materialization and Depository Services

The depository system leads the capital

market towards scrip less trading through
de-materialization
of securities

De-materialization is a process by which

physical share certificates are converted
into electronic form and credited in the
De-materialization and Depository Services

To trade in de-materialized form, a Demat

account is
to be opened

The organization that offers this facility is

called Depository Participant
(DP)
 De-materialization and Depository Services

In India, two depositories are operating in

the market, namely, National Securities
Depository Limited (NSDL) and Central
Depository Services
Limited (CDSL).

Many share brokers firms and commercial

banks act as depository
participants
 De-materialization Process

6
Depository Depository Participant
2

5 4 3 1 7

Registrar Investor
 De-materialization Process

1. Investors surrender certificates DP

todematerializati for
on.
2. DP informs the depository
through media. electron
[Link] sends original ic
certificate
to the Registrar for verification and
cancellation.
[Link] sends formal request
for dematerialization to the Registrar.
 De-materialization Process

[Link] informs depository of cancellation

of certificates and electronic credit given to
the customer.
[Link] updates its account and
informs the DP concerned.
[Link] informs the customer about the credit in
his account.
National Stock
Exchange
(NSE)
 National Stock Exchange (NSE)

Established in 1992 at Mumbai – set up by

LIC, GIC, Commercial banks and other
financial institutions with a paid up capital
of Rs.25 crores.

Mumb
 Features and Objectives of NSE

1. Nationwide coverage
Satellite linked trading facility
More than 6000 trading terminals in 370
cities
 Features and Objectives of NSE

2. On-line Trading (Electronic Trading system)

It has adopted a computer based trading
system
Main computer at NSE is linked with the
computers of trader members through
satellite link
 Features and Objectives of NSE

3. Transparency in dealing
Screen based trading ensures
complete
transparency

Investors can verify the rate at which

transactions took place
 Features and Objectives of NSE

4. Matching of orders
The computer itself matches the buy and sell
orders of securities
 Features and Objectives of NSE

5. Trading in dematerialized form

Trading is carried on dematerialized
form and settlement of transactions
are made on rolling settlement basis
(T+2)
 Features and Objectives of NSE
1. Nationwide coverage

2. On-line Trading

3. Transparency in dealing

4. Matching of orders

5. Trading in dematerialized form

 Segments of NSE

Wholesale Capital Market

Debt Market Segment
 Wholesale Debt Market

1) Debt instruments like securitie

government treasury bills, PSU s, CDs
bonds, CPs and traded. are

2) Transactions are wholesale in

nature.

3) It involves high value.

4) Individual brokers are not

permitted.
 Capital Market Segment

1) Retail market.

2) Shares and debentures of companies are

traded.

3)Listing is provided to companies having

minimum paid up capital of Rs.10 crores.

4) About 700 securities are listed.

Bombay Stock
Exchange (BSE)
Bombay Stock Exchange

Mumb
ai
 Bombay Stock Exchange (BSE)
●
Established in the year
1875
●
Voluntary non-profit
association
●
● First
Oldestone
in recognized
Asia by
government
permane
●
Only one that has been nt
granted registration
 Bombay Stock Exchange (BSE)
●
Premier stock
exchange
●
Trendsetter in stock market
trading
crores
●
Companies having at least are
Rs.10 eligible to be listed in BSE
●
About 6000 scrips listed

●
Securities are classified into many groups
like group A, B, T and Z
 Bombay Stock Exchange (BSE)
●
“Group A” containssecurities having
good track record and large volume of
business

●
Traditionally trading was carried on outcry
system

●
In 1995 it introduced a screen based trading
called
BOLT (BSE On-Line Trading)

●
 ge
an
c h
E x
n d ia
s a
In d
itie f
r o
cu a rd
Se Bo

(SEBI)
SEBI

Mumb
ai
SEBI
● It is the regulatory and developmental agency
of Indian Capital Market

● Established in 1988 based on the

recommendations of G S Patel Committee

● It was made a statutory body under

Securities and Exchange Board of India Act
1992
Reasons for establishment of S E B I
During 1980’s the capital market
witnessed a tremendous growth due to
increase in investor population
This hike in market capitalization led to
various malpractices by companies,
brokers, merchant bankers, investment
consultants, etc.
Reasons for establishment of S E B I

All these made huge losses to the ordinary

investors and they have lost their confidence in
this segment

This made Government of India to

constitute a regulatory body known as
SEBI.
Common Malpractices in stock market

a. Self-styled merchant bankers

b. Unofficial private placement

[Link] rigging(artificially inflating

prices of certain shares by a group)

d. Unofficial premium on new issue

e. Non-adherence of provision to
Companies Act
stoc
f. Violationof rules and regulations k
of exchanges and listing
formalities
 Purpose and Role of SEBI

SEBI was constituted by the Govt. of India

with a view to create a favorable
environment for efficient mobilization and
allocation of resources through securities
market
 Purpose and Role of SEBI
SEBI was constituted for the purpose of
fulfilling the needs of three groups:
[Link] – SEBI ensures a market place where
the companies can confidently raise
finance in easy, fair and efficient manner.
 Purpose and Role of SEBI
SEBI was constituted for the purpose of
fulfilling the needs of three groups:

2. Investors – Provides protection of their

rights and interest by providing authentic
information
 Purpose and Role of SEBI
SEBI was constituted for the purpose of
fulfilling the needs of three groups:

3. Intermediaries – Offers a competitive

professional market by equipping
intermediaries to render better services to
the investors and issuers
Objectives of SEBI
 Objectives of SEBI
1. Regulatory functions

To regulate the securities market and

ensure fair practices
 Objectives of SEBI
2. Protection of rights

To protect the interest of investors and

thereby attract a steady flow of savings
into capital market
 Objectives of SEBI
3. Prevention of malpractices
To prevent trading
malpractices
 Objectives of SEBI
4. Develop a code of conduct

To promote efficient services by brokers,

merchant bankers etc. so as to make them
competitive and professional
 Objectives of SEBI
1. Regulatory functions

2. Protection of rights

3. Prevention of malpractices

4. Develop a code of conduct

Functions of
SEBI
Functions of SEBI

A. Regulatory Functions

B. Developmental Functions

C. Protective Functions
Regulatory
Functions of
SEBI
 Regulatory functions of SEBI

1. Registration of brokers and sub

brokers in the market
 Regulatory functions of SEBI

2. Registration of investment
schemes and Mutual
Funds
 Regulatory functions of SEBI

3. Regulates the functioning of share

brokers, underwriters etc.
 Regulatory functions of SEBI

4. Regulation of takeover bids by

companies
 Regulatory functions of SEBI

5. Conducting enquiries and audits of

stock exchanges
 Regulatory functions of SEBI

6. Levying fee or other charges as

specified by the Act
Developmental
Functions of
SEBI
Developmental Functions of SEBI

1. Promoting investor education and

training of intermediaries
 Developmental Functions of SEBI

2. Conduct of research and publication of

useful information
Developmental Functions of SEBI

3. Undertaking measures to
develop the capital
market
 Protective
Functions of
SEBI
 Protective Functions of SEBI

1. Prohibition of fraudulent and unfair

trade practices like misleading
statements,
manipulations, price rigging etc.
 Protective Functions of SEBI

2. Controlling insider trading in securities to

protect the interest of individual
investors

Insider means the top officials of the company,

who can make bulk purchase or sale for making
huge profit on the basis of vital information
such as declaration of dividend on a future date
 Protective Functions of SEBI

3. Undertaking steps for investor

protection
 Protective Functions of SEBI

4. Promotion of fair practices and code of

conduct in securities market
Stock Market Indices
 Stock Market Indices
Stock market index is a device, which
reflects the relative change in prices of
securities in a stock exchange

The general trend of the market can be

measured by studying stock market index.
Eg: BSE Sensex (Sensitive Index), BSE 100, S&P
CNX Nifty, S&P CNX500, CRISIL 500 etc.
 Stock Market Indices
BSE Sensex is calculated on weighted
average basis of 30 shares, and Nifty
applied in NSE is based on 50 shares.

Sensex – Sensitive Index

Nifty – The National Stock Exchange