FINANCIAL MARKET

Financial  markets  are  helpful  to  provide  liquidity  in  the  system  and  for  smooth functioning  of  the system.  These  markets  are  the  centers that  provide facilities  for buying and  selling of financial claims and services. The financial markets match the demands of investment with the supply of capital from various sources.

According to functional basis financial markets are classified into two types.

They are:

Ø Money markets (short-term)

Ø Capital markets (long-term)

According to institutional basis again classified in to two types. They are

Ø Organized financial market

Ø Non-organized financial market

The  organized  market  comprises  of  official  market  represented  by  recognized institutions,  bank  and  government  (SEBI)  registered/controlled  activities  and intermediaries.  The  unorganized  market  is  composed  of  indigenous  bankers, moneylenders, individual professional and non-professionals.

MONEY MARKET:

Money market is a place where we can raise short-term capital.

Again the money market is classified in to

Ø Inter bank call money market

Ø Bill market and

Ø Bank loan market Etc.

Ø E.g.; treasury bills, commercial papers, CD's etc.

Capital market:

The capital market is the market for securities, where companies and the

Government can raise long term funds.The capital market includes the

Stock market and the bond market.Financial regulators ensure that investors are protected against fraud .The capital markets consist of the primary market,where new issues are distributes to investors,and the secondary market ,where existing securities are traded.

Capital market plays a vital role in channelizing the saving of individuals for investment in the economic development of the country. As a result the investors are not constrained by their individual abilities,but by the abilities of the companies,which in turn enhance the saving and the investments in the country, liquidity of capital market is an important factor affecting growth.

Since projects require long term finance,but on the other hand,the investor may not like to relinquish control over their saving for a long time.A liquid stock market ensures a quick exit without incurring heavy losses or costs.Thus development of efficient market system is necessary for creating conductive climate for investment and economic growth.

Capital market is a place where we can raise long term market.

Again capital market is classified in to two types and they are

Ø  Primary market and

Ø  Secondary market.

Ø  E.g.: Shares, Debentures, and Loans etc.

        PRIMARY MARKET:

Primary  market  is  generally  referred  to  the  market  of  new                   issues   or  market  for  mobilization  of  resources  by  the  companies and  government  undertakings, for  new projects  as  also  for  expansion,  modernization,  addition,  diversification  and  up  gradation. Primary market is also referred to as New Issue Market. Primary market operations include new issue of shares by new and existing companies, further and right issues to existing shareholders, public offers, and issue of debt instruments such as debentures, bonds, etc.

The primary market is regulated by the Securities and Exchange Board of India (SEBI a government regulated authority).

Function: 

     The  main  services  of  the  primary  market  are  origination,  underwriting,  and distribution.  Origination deals with the origin of the new issue. Underwriting contract make  the  shares  predictable  and  remove  the  element  of  uncertainty  in  the subscription. Distribution refers to the sale of securities to the investors.

The following are the market intermediaries associated with the market:

1.     Merchant banker/book building lead manager

2.     Registrar and transfer agent

3.  Underwriter/broker to the issue

3.     Adviser to the issue

5.  Banker to the issue

4.     Depository

7.  Depository participant

     Investors’ protection in the primary market:

To  ensure  healthy  growth  of  primary  market,  the  investing  public  should  be protected.  The  term investor protection has a wider meaning in the primary market. The principal ingredients of investors’ protection are:

Ø Provision of all the relevant information

Ø Provision of accurate information and

Ø Transparent allotment procedures without any bias.

SECONDARY MARKET:

       The primary market deals with the new issues of securities. Outstanding securities are  traded  in  the  secondary  market,  which  is commonly  known  as stock  market or stock exchange. “The secondary market is a market where scrip’s are traded”. It is a market  place  which  provides  liquidity  to  the  scrip’s  issued  in  the  primary  market. Thus,  the  growth  of  secondary  market  depends  on  the  primary  market. More  the number  of  companies  entering  the  primary  market,  the  greater  are  the  volume  of trade  at the secondary  market. Trading activities in the secondary  market  are done through the recognized stock exchanges which are 23 in number including Over The Counter  Exchange  of  India  (OTCE),  National  Stock  Exchange  of  India  and

Interconnected Stock Exchange of India.

           Secondary  market  operations  involve  buying  and  selling  of  securities  on  the  stock exchange  through  its  members.  The  companies  hitting  the  primary  market  are mandatory  to  list  their  shares  on one  or  more  stock  exchanges  in  India.  Listing  of scrip’s provides liquidity and offers an opportunity to  the investors  to buy or sell the scrip’s.

The following are the intermediaries in the secondary market:

1.    Broker/member of stock exchange – buyers broker and sellers broker

2.    Portfolio Manager

3.   Investment advisor

3.    Share transfer agent

5.    Depository

6.    Depository participants.

         STOCK MARKETS IN INDIA:

Stock  exchanges  are  the  perfect  type  of  market  for  securities  whether  of  government and semi-govt  bodies or other public bodies  as  also for shares  and debentures issued by the  joint-stock  companies.  In  the  stock  market,  purchases  and sales  of  shares  are affected in conditions of free competition. Government securities are traded outside the trading  ring  in  the  form  of  over  the  counter  sales  or  purchase.  The  bargains  that  are

struck  in  the  trading  ring  by  the  members  of  the  stock  exchanges  are  at  the  fairest prices determined by the basic laws of supply and demand.

   Definition of a stock exchange:

“Stock exchange  means any body  or  individuals  whether  incorporated  or  not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.” The securities include:

Ø Shares of public company.

Ø Government securities.

Ø Bonds

History of Stock Exchanges:

The only stock exchanges operating in the 19 th  century were those of Mumbai setup in  1875  and  Ahmadabad set  up  in  1894. These  were organized  as voluntary  non-profit-marking  associations of brokers  to regulate  and protect their  interests.  Before the control on securities under the constitution in 1950, it was a state subject and the Bombay  securities  contracts  (control)  act  of  1925  used  to  regulate  trading  in securities. Under this act, the Mumbai stock exchange was recognized in 1927 and Ahmadabad in  1937.  During  the  war  boom,  a  number  of  stock  exchanges  were organized. Soon  after it  became  a central subject, central  legislation was proposed and a committee headed by A.D.Gorwala went  into the bill for securities regulation. On  the  basis  of  the  committee’s  recommendations  and  public  discussion,  the securities contract (regulation) act became law in 1956.

Functions of Stock Exchanges:

Stock  exchanges  provide  liquidity  to  the  listed  companies.  By  giving  quotations  to the  listed companies,  they  help  trading  and  raise  funds  from  the  market. Over  the hundred  and  twenty  years  during  which  the  stock  exchanges  have  existed  in  this country  and    through  their  medium,  the  central  and  state  government  have  raised  crores    of  rupees  by  floating  public  loans.  Municipal  corporations,  trust  and  local bodies have obtained from the public their financial requirements, and industry, trade and  commerce- the  backbone  of  the  country’s  economy-have  secured  capital  of

crores  or  rupees through  the issue  of  stocks, shares  and  debentures  for  financing their  day-to-day  activities,  organizing  new  ventures  and  completing  projects  of expansion,  diversification  and  modernization.  By  obtaining  the  listing  and  trading facilities,  public  investment  is  increased  and  companies  were  able  to  raise  more funds. The quoted  companies with wide public  interest have enjoyed some benefits and assets valuation has become easier for tax and other purposes.