FINANCIAL MARKET &

SERVICES

INTRODUCTION TO
FINANCIAL MARKETS &
SERVICES
 BROAD COVERAGE OF THE COURSE

 This is a half credit course and we expect to cover it in

following six sessions
 Introduction to Financial Markets and Services
 Innovative methods of project financing (Securitization,
Factoring, Forfaiting etc.)
 Public Issue management
 Credit card, Debit card and Smart card
 Credit rating
 Venture capital Financing
 EVALUATION

 CLASS TEST / ASSIGNMENTS: 10 MARKS

 CLASS PARTICIPATION: 10 MARKS

 FINAL EXAMINATION: 30 MARKS

 INTRODUCTION TO FINANCIAL
MARKETS & SERVICES
AGENDA TODAY
 Investment
♦ Meaning, Objective and Characteristics
♦ Types of Investors
♦ Investment avenues
 Importance and need for investment in securities

♦ Financial Market & its segments

♦ Types of equity issues
 Stock Market and Stock Exchanges: Need & Functions

 Important Stock Exchanges in India.

♦ Financial Services and types.

 INVESTMENT
 INCOME = EXPENDITURE + SAVINGS
 Investment is an activity in which people are
engaged to utilize their savings for better
returns to meet future needs.
 Investments are made from savings; however
all savers are not necessarily investors!
 It is a commitment / employment of funds
made with the aim of achieving additional
income or growth in value.
 Investment is an activity that involves risk.
 INVESTMENT (contd.)
 In financial sense, investment is a commitment of a
person’s surplus funds / savings to derive income in future.
The income could be in the form of interest, dividend,
premiums, pension benefits, insurance policies,
appreciation in their values, etc. This investment generates
financial assets.
 Economically, investment would mean net addition to
economy’s capital stock in the form of creation of goods or
services e.g. investment in new constructions, plant and
machinery, etc. This investment generates physical assets
as also other benefits like employment, technology, etc..
 FEATURES OF INVESTMENT
 All investments are governed by certain
characteristics / basic features. These are:
♦ RETURNS : Primary objective
♦ RISKS : Inherent
♦ LIQUIDITY : Marketability
♦ SAFETY : Certainty of recovery
HIGHER RETURNS, HIGHER RISKS!
HIGHER LIQUIDITY, HIGHER SAFETY!
OBJECTIVES OF INVESTMENT

 Maximizing returns
 Minimizing risk

 Hedging against inflation or price

fluctuations resulting in loss of value of

your portfolio / financial assets.
 TYPES OF PARTICIPANTS
IN ANY MARKET
 HEDGERS
 SPECULATORS

(Scalpers, Day Traders and Position

Traders)
Speculators could also be classified as
Bulls, Bears, Lame Ducks and Stags!!
 ARBITRAGERS
INVESTMENT V/S SPECULATION
 Both are closely related since both involve
purchase of assets and both aim at good
returns.
 They are different in following respects:
♦ Risks: Less in investment and more in speculation
♦ Capital gain: Prime short term objective of
speculation v/s Stable return on investment
♦ Time period: Investment is long term, speculation
is not.
 INVESTMENT, SPECULATION
 Investment is planned carefully, evaluated and
then funds are allocated. Is systematic. Requires
knowledge of various alternatives / avenues to
plan.
 Speculation is taking calculated risks. Is
somewhat systematic. Also requires knowledge.
 Speculation V/S Gambling.
 Gambling creates artificial and unnecessary risks
in the hope of big and quick returns e.g. horse
races, lotteries, etc.
 Gambling and speculation
 Speculation typically lasts longer than gambling but is of shorter
duration than investments. A speculation usually involves the
purchase of a salable asset in hopes of making a quick profit from
an increase in the price of the asset which is expected to occur
within a few weeks or months. Those involved in speculation are
usually reluctant to refer to this activity as speculation because
they dislike the connotations of the word; they prefer to refer to
speculations as short term investment activity.
 A gamble is usually a very short-term investment and is a game of
chance. The holding period for most gambles can be measured in
seconds. The result of so-called investment is quickly resolved by
the roll of a dice or the turn of a drum or card. Such activities have
planning horizons that are far too short to undertake any research
that usually precedes an investment activity.
Importance and need for investment in
securities
 Financial Market

- What is a market?
- In financial market, financial
assets are sold and bought.
 Economy is a bigger market!!

Various participants in an economy are:

 Household sector,

 Business Units in the industrial or commercial sector,

 Private Sector V/S Public Sector i.e. Government

organizations, departments and units involved in

various economic activities and transactions involving
money, etc.
All of them spend money. Some spend more than they
earn while others earn more than they spend!!
 FINANCIAL MARKET
BEHAVIOUR
Primary lenders: Cash surplus generators / household
sector
Ultimate borrowers: Deficit generators e.g. units in
Government, commercial and industrial sectors.

Financial market deals with transfer of funds from

primary lenders to ultimate borrowers through various
Mechanisms. This is possible and also necessary for
overall sustained development of economy.
 Financial Market’s mechanism for
transfer of funds
Transfer of funds from primary lenders to ultimate
borrowers:
 Primary lenders ► Banks ► Ultimate borrowers
(Fixed deposit is a financial asset for the primary
lender)
 Ultimate borrowers ► Public Issue of shares ►
Primary lenders (share is a financial asset for the
primary lender)
 When financial assets transferred are securities, the
market is known as securities market.
 SECURITIES MARKET
 Comprises two categories on the basis of maturity period:
♦ MONEY MARKET
Short term financial assets with one year or less maturity e.g.
Certificates of Deposit, treasury bills, etc. These are close
substitutes for money and hence form a good source for working
capital for business and industry.
♦ CAPITAL MARKET
Financial assets of more than one year maturity are sold or
bought. These include Equity shares, preference shares, bonds
and debentures, etc. They form a good source of long term funds
for business and industry.
 SECURITIES MARKET
 Comprises mainly two categories viz. primary market and
secondary market.
♦ PRIMARY MARKET
Securities issued are either new securities or securities which are already
outstanding and owned by the investors. Private companies and PSUs may
issue these securities (shares, bonds, debentures, etc.) to raise required
capital. New issues could be in the form of public issue, rights issue or
private placement.
♦ SECONDARY MARKET
This market deals with securities which have been already issued and
subscribed to and are owned by individuals or financial institutions. These
can then be traded by and between the investors. The buying and selling
usually takes place through the mechanism of a stock exchange.
 TYPES OF ISSUES
 Methods which are used for floating shares of a
company in the primary market (new issues market)
are:
 Public Issue: Sale to members of public (at fixed price or
through book building process), prospectus is necessary,
Cost to the company is high.
 Rights Issue: Sale to existing shareholders in proportion to
their current holding (Section 81 0f Companies Act 1956).
Prospectus not necessary. Less costly process.
 Private Placement: Sale to selected group of investors
usually institutional investors, financial institutions, mutual
funds, etc. Prospectus not necessary. Least costly process.
 STOCK MARKETS
 They form an integral and essential part of the capital markets.
 Indian Stock Markets are one of the oldest in Asia. Their history dates back to
over 150 years.
 East India Company played a dominant role and used to transact business in its
own loan securities (end of eighteenth century).
 Trade took place only in a few corporate stocks and shares in banks and cotton
presses.
 There were only half a dozen brokers recognized by banks and merchants
during 1840 to 1850.
 1850's witnessed a rapid development of commercial enterprise and brokerage
business attracted many men into the field and by 1860 the number of brokers
increased to 60.
 In 1860-61 the American Civil War broke out and cotton supply from United
States to Europe was stopped; This led to growth of cotton industry in India,
which in turn increased the trading in shares of cotton presses. Disastrous
slump followed in 1874 with the American civil war coming to an end.
 STOCK MARKETS….contd.
 The brokers established offices on Dalal Street in 1874.
 In 1887, they formally established in Bombay, the "Native Share
and Stock Brokers' Association" (which is alternatively known
as " The Stock Exchange ").
 In 1895, the Stock Exchange acquired premises on Dalal Street
and it was inaugurated in 1899. Thus, the Stock Exchange at
Bombay (BSE) was born.
 Stock exchanges later came up at Ahmedabad (1894) and
Kolkatta (1908).
 Indian cotton and jute textiles, steel, sugar, paper and flour mills
and all companies generally enjoyed phenomenal prosperity, due
to the First World War.
 STOCK MARKETS….contd.
 Madras Stock Exchange (1920 – 23) and revived in 1935. In 1957
the name was changed to Madras Stock Exchange Limited.
 In early sixties there were eight recognized stock exchanges in
India viz. Bombay, Calcutta, Madras, Ahmedabad, Delhi,
Bangalore, Hyderabad and Indore. They were recognized under
the Securities Contracts (Regulation) Act, 1956.
 The number virtually remained unchanged, for nearly two
decades. During eighties, however, many stock exchanges were
established.
 At present, there are totally twenty one recognized stock
exchanges in India excluding the Over The Counter Exchange
of India Limited (OTCEI) and the National Stock Exchange
(NSE) of India Limited.
 Stock markets are governed by Securities and Exchange Board of
India (SEBI) established in 1989.
 Trading Pattern of the Indian Stock Market

 Trading in Indian stock exchanges is limited to

listed securities of public limited companies:
 Specified securities (forward list) and non-
specified securities (cash list).
 Equity shares of dividend paying, growth-oriented
companies with a paid-up capital of at least Rs.50
million and a market capitalization of at least
Rs.100 million and having more than 20,000
shareholders are, normally, put in the specified
group and the balance in non-specified group.
 Trading Pattern of the Indian Stock Market

 A member broker in an Indian stock exchange can act as

an agent, buy and sell securities for his clients on a
commission basis and also can act as a trader or dealer as a
principal, buy and sell securities on his own account and
risk.
 In contrast, a member can act as a jobber or a broker only
on New York and London Stock Exchanges.
 Conventional exchanges had the drawbacks such as
absence of liquidity, lack of transparency, unduly long
settlement periods and benami transactions, which affected
the small investors. Hence, OTCEI was created in 1992
 PURPOSE OF STOCK / CAPITAL
MARKET

 It helps in the capital formation in the

country.
 It maintains active trading.
 It increases liquidity of assets.
 It also helps in price discovery process
 It facilitates speculation in controlled
manner thus avoiding gambling.
 FUNCTIONS OF
STOCK EXCHANGES
 To provide a market place where selling and purchasing of
securities can be done in a transparent manner and in a
controlled environment.
 To provide liquidity to investments made in securities.
 To help in valuation of securities.
 To provide a barometer / indication of overall performance of
the economy.
 Stock exchanges thus provide an important linkage between
the savings of the household sector and the investments in the
Corporate sector.
 Shortcomings of Stock Markets
 Scarcity of floating stocks: Financial institutions, banks and
insurance companies own 80% of the equity capital in the
private sector.
 Speculation: 85% of the transactions on the NSE and BSE
are speculative in nature.
 Price rigging: Evident in relatively unknown and low quality
scrips. Causes short time fluctuations in the prices.
 Insider trading: Obtaining market sensitive information to
make money in the markets.
 Financing from capital markets; there are two ways a
company can raise money from the financial markets: debt and
equity.
 Major stock exchanges in India

 NATIONAL STOCK EXCHANGE (NSE)

 BOMBAY STOCK EXCHANGE (BSE)
 OVER THE COUNTER EXCHNAGE OF
INDIA (OTCEI)
 INTERCONNECTED STOCK
EXCHANGE (ISE)
 National Stock Exchange (NSE)
 On the basis of the recommendations of high powered Pherwani Committee,
the National Stock Exchange was incorporated in 1992 by IDBI, ICICI,
IFCI, all Insurance Corporations, selected commercial banks and others.
Started functioning in 1994.
 International Class. Uses modern trading system viz. National Exchange
Automated Trading (NEAT) – State – of - the - art client-server based
application.
 Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
 Wholesale debt market operations are similar to money market operations -
Institutions and corporate bodies enter into high value transactions in
financial instruments such as government securities, public sector unit
bonds, commercial paper, certificate of deposit, etc.
 ADVANTAGE NSE!
 NSE has several advantages over the traditional trading
exchanges. These are:
1. NSE brings an integrated stock market trading network
across the nation.
2. Investors can trade at the same price from anywhere in the
country since inter-market operations are streamlined
coupled with the countrywide access to the securities.
3. Delays in communication, late payments and the
malpractice’s prevailing in the traditional trading mechanism
can be done away with greater operational efficiency and
informational transparency in the stock market operations,
with the support of total computerized network.
 IN GLOBAL CONTEXT
 NSE is the third largest exchange in the world next only to
NYSE, and NASDAQ in terms of number of transactions. It
is followed by BSE, which is the fifth largest exchange in the
world.
 India can also boast of the largest electronic order book;
 In the matter of single-stock futures, India leads the world,
followed by EURONEXT which is just about half of its size.
 Even in Index-futures, NSE volumes are next only to the
Chicago Mercantile Exchange and Eurex. No other market in
the world, including that of Japan, compares with the volume
of transactions of Indian markets
 Bombay stock exchange
 Bombay Stock Exchange is the oldest stock exchange in
Asia.
 BSE is the first stock exchange in the country which
obtained permanent recognition (in 1956).
 It switched over from the open outcry system to an online
screen-based order driven trading system in 1995.
 BSE has two of world's best exchanges, Deutsche Börse
and Singapore Exchange, as its strategic partners.
 The market capitalization as on December 31, 2007 stood
at USD 1.79 trillion.
 Bombay stock exchange
 The BSE Index, SENSEX, is India's first stock market index and is
tracked worldwide. It is an index of 30 stocks representing 12 major
sectors.
 Apart from the SENSEX, BSE offers 21 indices, including 12
sectoral indices. BSE has entered into an index cooperation
agreement with Deutsche Börse. This agreement has made
SENSEX and other BSE indices available to investors in Europe
and America
 The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT)
facilitates on-line screen based trading in securities. BOLT is
currently operating in 25,000 Trader Workstations located across
over 450 cities in India.
 OTCEI
 To provide improved services to investors, the country's first ring-less, scrip-
less, electronic stock exchange OTCEI was established by country's premier
financial institutions viz. Unit Trust of India (UTI), Industrial Credit and
Investment Corporation of India (ICICI), Industrial Development Bank of
India (IDBI), SBI Capital Markets, Industrial Finance Corporation of India
(IFCI), General Insurance Corporation (GIC) and its subsidiaries and
CanBank Financial Services.
 Trading at OTCEI is done over the centers spread across the country.
Securities traded on the OTCEI are classified into:
 Listed Securities - The shares and debentures of the companies listed on the
OTCEI can be bought or sold at any OTCEI counter all over the country and
they should not be listed anywhere else
 Permitted Securities - Certain shares and debentures listed on other
exchanges and units of mutual funds are allowed to be traded
 Initiated debentures - Any company with at least one lakh debentures of a
particular scrip can offer them for trading on the OTCEI.
INTERCONNECTED STOCK EXCHANGE
(ISE)
 Fourteen regional exchanges (excluding Calcutta,
Delhi, Ahmedabad, Ludhiana and Pune Stock
exchanges) have joined together to promote ISE
of India Ltd.
 Established in 1998
 Recognized by SEBI
 Started operations in 1999. Is recognized as a
National Level Exchange
 DEPOSITORIES
 Financial securities like shares, debentures, bonds, etc. are issued by
companies to investors who purchase them. They were earlier issued
in physical form or certificates. The trade used to take place between
the buyers and sellers through the clearing house of an exchange.
Issuing or transfer of certificates used to be done by the companies
or their authorized transfer agents.
 The physical form of transfer has now become outdated and replaced
by electronic form. Securities are represented by entries in the
depository accounts opened by the investors specifically for this
purpose.
 On selling, the seller’s account is debited and the buyers account is
credited. The securities are thus issued, held and transferred in
“dematerialized” form. Hence, seller and buyers both need to have
“Demat” accounts.
 “Depositories” are important for transactions in demat form.
 DEPOSITORIES
 “Depositories” are like banks. Banks hold cash while a depository holds
securities for investors in electronic form. A depository interacts with
clients through “Depository Participants” or simply referred to as “DPs”.
 There are two depositories in India:
- National Securities Depository Limited (NSDL) - estd. In 1996 and
- Central Depositories Services (of India) Limited (CDSL) –
established in 1999.
 They are regulated by SEBI
 Many banks function as Depository Participants.
 You can hold securities in physical or dematerialized form. However,
transfers are now a days only through demat accounts because of several
obvious advantages.
 TYPES OF INVESTORS

♦ INDIVIDUAL INVESTORS
Large in numbers, limited individual capacity,
usually lack the skill of extensive evaluation and
analysis before investing.
♦ INSTITUTIONAL INVESTORS
Few in numbers, Large surplus funds, engage
professionals to undertake extensive evaluation
and analysis before investing.
AVENUES FOR INVESTMENT

WHAT ARE THE

DIFFERENT AVENUES
FOR INVESTMENT?
AVENUES FOR INVESTMENT
♦ Fixed deposits with banks / Financial Institutions
♦ Post office deposits / schemes
♦ Government, Semi-Government securities / bonds
♦ Corporate FDs
♦ Mutual fund schemes
♦ Life insurance / pension policies
♦ Provident fund (EPF, PPF)
♦ Real estate
♦ Securities (equity, preference capital, debentures)
♦ Equity or commodity derivatives
 Financial System
 A system that establishes and provides a regular, smooth,
efficient and cost effective linkage between depositors and
investors.
 Features of a financial system:
 Provides an ideal linkage between depositors and investors
and thus encourages savings and investments
 Facilitates the expansion of financial markets over space
and time
 Promotes the efficient allocation of financial resources for
socially desirable and economically productive purposes
 Influences both the quality and pace of economic
development
 Constituents
 A Financial System comprises:
 Financial Institutions
 Financial Services
 Financial Markets
 Financial Instruments
 Financial Institutions
 Institutions that provide credit and credit related
services
 Savings’ mobilizers – They transfer funds from surplus
units to deficient units
 Financial Institutions
 They are the major constituents of the financial system in
the country
 They deal in financial resources which means that they
collect surplus money in the form of deposits from
individuals and institutions and lend them to trade and
industry, which are in deficit and require these funds.
 They may buy and sell financial instruments
 They need to be regulated by a regulatory body, which in
turn is governed by the political system in the country.
 We have banking as well as non banking financial
institutions
 There are also special institutions which provide financial
assistance to specific sectors and for specific purposes
 Financial Instruments
 Financial assets and securities dealt in in a financial market
 Characteristics
 Liquidity

 Collateral Value

 Marketability

 Transferability

 Maturity Period

 Transaction Cost

 Risk and Uncertainty

 Provision of options

 Tax Status

 ROI

 Price Fluctuations
 Financial Services
 Various services that are provided by financial institutions in a financial
system are called financial services.
 They are offered by both asset management companies and liability
management companies apart from the financial institutions.
 The financial services facilitate not only raising the required funds but also
ensuring their efficient distribution.
 These are usually provided by the stock exchanges, special and general
financial institutions, banks, non-banking finance corporations and
insurance companies.
 Regulated by SEBI, FMC, RBI and/or other regulatory bodies.
 Examples of Financial Services
 Leasing, credit cards, factoring, portfolio management
 Underwriting, discounting and rediscounting of bills
 Acceptances , brokerage and stock holding
 Deposit Insurance
 Securitization, Loan Syndication, Credit Rating
 Financial Services

 Objectives
 Fund Raising
 Funds Deployment
 Functions
 Specialized Services
 Regulation
 Economic Growth
 ASSIGNMENT

 What is a stock market index?

 Which are the stock market indices created by
BSE? How are they calculated? What do they
indicate?
 Which are the stock market indices created by
NSE? How are they calculated? What do they
indicate?
TYPICAL REVIEW QUESTIONS
 What are the functions of stock exchanges?
 Write short notes on:
ISE
OTCEI
NSE
Speculators and their types
BSE Sensex
S & P CNX Nifty
 TYPICAL REVIEW QUESTIONS
 Which are the national level stock exchanges in the country?
Write a short note on any one of them.
 What are depositories? What is a depository participant?
 Explain the role of depositories in securities trading.
 “Holding securities in demat form has several advantages” –
Explain.
 What is a stock market index? How is it calculated? Explain
with one example. (Home Work : Visit BSE website)
 Name any four major stock market indices and describe them
in brief.
 REVIEW QUESTIONS

 What is the need and functions of stock exchanges

in a country? Write a short note on the largest
stock exchange in the country.
 REFERENCES
 Financial Services by M. Y. Khan
 Finacial Services by Dr. S. Gurusamy
 Security Analysis & Portfolio Management by Fischer
Donald E. & Ronald J. Jordan (Prentice Hall of India)
 Financial Market Analysis by Blake, David, McGraw
Hill, London
 Investment Analysis & Portfolio Management by Frank
K. Reilly & Keith C. Brown (Seventh Edition)
 Security Analysis & Portfolio Management by S.
Kevin (Prentice Hall of India)