Financial Markets and Instruments
Financial Markets and Instruments
Financial Markets and Instruments
Markets &
instruMents
PLUS 2 – Ch-10- CBSE
Professor & Lawyer Puttu Guru Prasad
Senior Faculty Department of Commerce
VIVA the School by VVIT
CONCEPT OF FINANCIAL MARKET
A business is a part of an economic system that consists of two
main sectors –
households that save funds and business firms which invest
these funds.
1. Mobilization of Savings and Channeling 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 channelize surplus
funds into the most productive use.
2. Facilitate Price Discovery: You all know that the forces of demand and supply
help to establish a price for a commodity or service in the market. In the financial
market, households are suppliers of funds and business firms represent the
demand. The interaction between them helps establish a price for the financial
asset being traded in that particular market.
3. Provide 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. Holders of assets
can readily sell their financial assets through the mechanism of the financial
market.
It directs these savings into their most productive use leading to growth
and development of the economy.
Both the money market and the capital market are the centers
which arrange for the transfer of funds from the suppliers of
funds to the users of funds.
They differ, however, in regard to the maturity periods of the
financial assets created and dealt with for affecting the transfer
of funds.
As explained earlier, money market arranges for short term and
capital market provides for medium to long-term funds.
The time length in respect of short-term funds is less than and
up to one year.
➢IPO underwriters are typically investment banks that have IPO
specialists on staff.
➢These investment banks work with a company to ensure that
all regulatory requirements are satisfied.
➢The IPO specialists contact a large network of investment
organizations—such as mutual funds and insurance
companies—to gauge investment interest.
➢The amount of interest received by these large institutional
investors helps an underwriter set the IPO price of the
company's stock.
➢The underwriter also guarantees that a specific number of shares will be sold
at that initial price and will purchase any surplus.
SECONDARY MARKET
The secondary market is also known as the stock market or stock exchange.
It is a market for the purchase and sale of existing securities.
It helps existing investors to disinvest and fresh investors to enter the market.
It also provides liquidity and marketability to existing securities.
It also contributes to economic growth by channelizing funds towards
the most productive investments through the process of disinvestment
and reinvestment.
Securities are traded, cleared and settled within the regulatory
framework prescribed by SEBI.
Advances in information technology have made trading through stock exchanges
accessible from anywhere in the country through trading terminals.
Along with the growth of the primary market in the country, the
secondary market has also grown significantly during the last ten years.
STOCK EXCHANGE
A stock exchange is an institution which provides a platform for buying and selling
of existing securities. As a market, the stock exchange facilitates the exchange of a
security (share, debenture etc.) into money and vice versa. Stock exchanges help
companies raise finance, provide liquidity and safety of investment to the
investors and enhance the credit worthiness of individual companies.
Meaning of Stock Exchange 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 a Stock Exchange The efficient functioning of a stock exchange creates
a conducive climate for an active and growing primary market for new issues. An
active and healthy secondary market in existing securities leads to positive
environment among investors.
The following are some of the important functions of a 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.
5. Spreading of Equity Cult: The stock exchange can play a vital role in ensuring
wider share ownership by regulating new issues, better trading practices and
taking effective steps in educating the public about investments.
OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment Corporation of
India, the Industrial Development Bank of India, the Industrial Finance Corporation of India, and
other institutions, and is a recognized stock exchange under the SCR Act.
The OTC Exchange Of India was founded in 1990 under the Companies Act 1956 and was
recognized by the Securities Contracts Regulation Act, 1956 as a stock exchange. The OTCEI is no
longer a functional exchange as the same has been de-recognised by SEBI vide its order dated 31
OTC vs Exchange
➢ Secondary market refers to a market wherein already issued
securities and financial instruments are traded.
➢ It includes both Stock exchanges and OTC market.
➢ Exchange refers to the formally established stock exchange wherein
securities are traded and they have a defined set of rules for the
participants.
It has been promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI Capital
markets and Can Bank Financial Services. SBI Capital markets and Can
Bank Financial Services
OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)
•It is fully computerized, transparent, single
window exchange ‘which commenced trading
in 1992.
Minimum Capital Requirements: The requirement for the minimum issued equity
capital is 30 lakh rupees, which is approximately $40,000.
Large Company Restrictions: Companies with issued equity capital of more than 25
crore rupees ($3.3 million) are not allowed to be listed.
7. Levying fee or other charges for carrying out the purposes of the Act.
8. Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as
may be delegated by the Government of India.
Development Functions of SEBI
1. Investor education 2. Training of intermediaries 3. Promotion of fair
practices and code of conduct of all SRO’s. 4. Conducting research
and publishing information useful to all market participants.
2. The Organisation Structure of SEBI As SEBI is a statutory body there
has been a considerable expansion in the range and scope of its
activities.
3. Each of the activities of the SEBI now demands more careful, closer,
coordinated and intensive attention to enable it to attain its
objectives.
4. Accordingly, SEBI has been restructured and rationalized in tune with
its expanded scope.
5. It has decided its activities into five operational departments. Each
department is headed by an executive director.
Development Functions
• Apart from its head office at Mumbai, SEBI has BUSINESS STUDIES 284
opened regional offices in Kolkata, Chennai, and Delhi to attend to
investor complaints and liaise with the issuers, intermediaries and
stock exchanges in the concerned region.
• The SEBI also formed two advisory committees. They are the Primary
Market Advisory Committee and the Secondary Market Advisory
Committee.
• These committees consist of the market players, the investors
associations recognized by the SEBI and the eminent persons in the
capital market. They provide important inputs to the SEBI’S policies.
The objectives of the two Committees are as follows:
a. To advise SEBI on matters relating to the regulation of intermediaries for
ensuring investors protection in the primary market.
b. To advise SEBI on issues related to the development of primary market in India.
c. To advise SEBI on disclosure requirements for companies.
d. To advise for changes in legal framework to introduce simplification and
transparency in the primary market.
e. To advice the board in matters relating to the development and regulation of
the secondary market in the country. The committees are however
nonstatutory in nature and the SEBI is not bound by the advise of the
committee.
f. These committees are a part of SEBI’s constant endeavor to obtain a feedback
from the market players on various issues relating to the regulations and
development of the market.