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Assignment 3 Fmi

The document discusses the functions of stock exchanges in India, highlighting their roles in facilitating trading, price determination, liquidity provision, and market surveillance. It also explains the capital market, detailing its types of instruments, the primary and secondary markets, the role of investors, and the importance of regulation and oversight. Overall, both stock exchanges and capital markets are essential for capital formation, economic development, and maintaining market integrity.

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5 views5 pages

Assignment 3 Fmi

The document discusses the functions of stock exchanges in India, highlighting their roles in facilitating trading, price determination, liquidity provision, and market surveillance. It also explains the capital market, detailing its types of instruments, the primary and secondary markets, the role of investors, and the importance of regulation and oversight. Overall, both stock exchanges and capital markets are essential for capital formation, economic development, and maintaining market integrity.

Uploaded by

kanishk.sharma146
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© © All Rights Reserved
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Name: Kashish Agarwal

Enrolment number: 05321101722


Class: BBA(E1)

ASSIGNMENT 3

Q1. Explain functions of stock exchange in India.


ANSWER
Stock exchanges play several crucial functions in India's financial system. Here
are the primary functions of stock exchanges in India:

Facilitating Trading: Stock exchanges provide a platform for buying and selling
of securities such as stocks, bonds, and derivatives. They facilitate the trading of
these securities between investors, including retail investors, institutional
investors, and traders.

Price Determination: Stock exchanges help in the discovery of prices for


securities through the interaction of supply and demand forces. The prices of
securities quoted on the exchange reflect the collective assessment of market
participants regarding the value of those securities.

Liquidity Provision: Stock exchanges enhance market liquidity by providing a


centralized marketplace where investors can readily buy or sell securities at
transparent prices. This liquidity ensures that investors can enter or exit
positions in securities with relative ease.

Market Surveillance: Stock exchanges monitor trading activities to detect and


deter market manipulation, insider trading, and other fraudulent practices. They
implement rules and regulations to maintain the integrity and fairness of the
market.
Listing and Delisting: Stock exchanges facilitate the listing of securities issued
by companies, allowing them to raise capital from the public through initial
public offerings (IPOs) or follow-on offerings. Similarly, exchanges may also
delist securities that no longer meet listing requirements or fail to comply with
regulatory standards.

Capital Formation: Stock exchanges play a vital role in mobilizing savings and
channeling them into productive investments. By providing a platform for
companies to raise capital from investors, stock exchanges facilitate the process
of capital formation, which fuels economic growth and development.

Price Transparency: Stock exchanges promote transparency in the financial


markets by providing real-time price information for traded securities. Investors
can access this information to make informed investment decisions based on
current market conditions.

Risk Management: Stock exchanges implement risk management measures to


mitigate counterparty risk and ensure the smooth functioning of the market.
These measures include margin requirements, position limits, and circuit
breakers to prevent excessive volatility and systemic risks.

Market Education and Awareness: Stock exchanges play a role in educating


investors and enhancing financial literacy through various initiatives such as
investor awareness programs, seminars, and publications. These efforts help
investors better understand the functioning of the capital markets and make
informed investment decisions.

Overall, stock exchanges serve as crucial intermediaries in the financial system,


providing a platform for capital formation, price discovery, and trading of
securities while maintaining market integrity and investor confidence.

Q2. Discuss capital market


ANSWER
The capital market is a segment of the financial market where long-term debt
and equity securities are bought and sold. It facilitates the raising of capital for
companies and governments, allowing them to finance their operations,
investments, and growth initiatives. Here are some key aspects and functions of
the capital market:

Types of Instruments: The capital market primarily deals with two types of
instruments: equity and debt. Equity instruments, such as stocks or shares,
represent ownership in a company and entitle the holder to a share of profits and
voting rights. Debt instruments, such as bonds or debentures, represent loans
provided to companies or governments in exchange for periodic interest
payments and eventual repayment of principal.

Primary Market: The primary market is where newly issued securities are
bought and sold for the first time. Companies and governments raise capital by
issuing new equity or debt securities to investors through processes like initial
public offerings (IPOs) or bond issuances. The primary market provides an
avenue for capital formation and expansion for issuers.

Secondary Market: The secondary market is where existing securities are traded
among investors after their initial issuance in the primary market. Stock
exchanges and over-the-counter (OTC) markets facilitate the trading of
securities in the secondary market. Investors buy and sell securities based on
their assessment of market conditions, company performance, and other factors.
The secondary market provides liquidity to investors by allowing them to enter
or exit positions in securities.

Role of Investors: Investors play a crucial role in the capital market by


providing the funds needed for companies and governments to finance their
activities. Investors include individual retail investors, institutional investors
(such as mutual funds, pension funds, insurance companies, and hedge funds),
and foreign investors. They allocate their capital across different asset classes
and investment opportunities based on their risk tolerance, investment
objectives, and market outlook.
Risk and Return: The capital market involves a trade-off between risk and
return. Investors expect to be compensated for the risk they assume when
investing in securities. Equity securities generally offer higher potential returns
but also carry higher risk due to their ownership stake in companies, which
exposes investors to business and market risks. Debt securities typically offer
lower returns but provide more predictable income streams and lower risk of
capital loss compared to equities.

Regulation and Oversight: Capital markets are subject to regulatory oversight


by government authorities and regulatory bodies to ensure fair and transparent
trading practices, protect investors' interests, and maintain market integrity.
Regulations govern various aspects of capital market activities, including
securities issuance, trading, disclosure requirements, and investor protection
measures.

Role in Economic Development: The capital market plays a vital role in


fostering economic development and growth by mobilizing savings, allocating
capital to productive investments, and facilitating entrepreneurship and
innovation. A well-functioning capital market promotes capital formation,
facilitates efficient resource allocation, and enhances productivity, thereby
contributing to overall economic prosperity.

Overall, the capital market serves as a crucial component of the financial


system, providing a platform for companies and governments to access funding
and for investors to allocate capital, manage risk, and achieve their financial
goals.

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