FINANCIAL MARKET.pptx finance,drivatives

Financial Securities
Financial security is a document
of a certain monetary value.

Securities Market
 The securities market is the market for equity,
debt, and derivatives.
 The debt market, in turn, may be divided into
three parts, viz., the government securities
market, the corporate debt market, and the
money market.
 The derivatives market may divided into two
parts, viz., the option market and the futures
market.

Financial Market
 The transfer of funds between primary lenders
and ultimate borrowers takes place through the
creation of securities or financial assets.
 If the investor deposits the money in the fixed
deposit of a commercial bank, the bank issues him
a fixed deposit receipt which is a financial asset.
 Issue of share certificate by the company is also
the example of financial asset.

Financial Market
 The commodity being exchanged is a financial asset instead
of a physical asset.
 The lender of funds (or investor) is the buyer of the asset
and the borrower of funds is the seller of the asset (or issuer
of the security).
 The mechanism or system through which financial assets
are created and transferred is known as the financial market.
 When the financial assets transferred are corporate
securities and government securities, the mechanism of
transfer is known as securities market.

Segments of Financial Market
 Different types of securities are traded in the
securities market.
 These may include ownership securities, debt
securities, short-term securities, long-term
securities, government securities, non-government
or corporate securities.
 On the basis of the maturity period of securities
traded in the market, the securities market is
segmented into money market and capital market.

Money Market
 Money market is the market for short-term
financial assets with maturities of one year or
less.
 Treasury bills, commercial papers, certificate of
deposits, etc. are the short-term securities
traded in the money market.
 Money market is the main source of working
capital funds for business and industry.

 The short-term requirements of borrowers can
be met by the creation of money market
securities, which can be purchased by lenders
with short-term surpluses.
 In India, the money market has a narrow base
with limited number of participants who are
mostly financial institutions.

Capital Market
 Capital market is the market segment where
securities with maturities of more than one
year are bought and sold.
 Equity shares, preference shares, debentures
and bonds are the long-term securities traded
in the capital market.
 The capital market is the source of long-term
funds for business and industry.

Types of Financial Market
 The financial market may be classified as
primary market or secondary market.
 Primary Market: The market mechanism for the
buying and selling of new issues of securities is
known as primary market. This market is also
termed as new issues market because it deals
in new issues of securities.

Types of Financial Market
 Secondary Market: It deals with securities which
have already been issued and are owned by
investors, both individual and institutional.
 These may be traded between investors.
 The buying and selling of securities already issued
and outstanding take place in stock exchanges.
 Stock exchanges constitute the secondary market
in securities.

Participants in the Financial Market
 The major participants are the buyers and sellers of securities
or the investors and the issuers.
 Financial intermediaries are the second major class of
participants in the financial system.
 There are two types of financial intermediaries in the financial
system, namely banking financial intermediaries and non-
banking financial intermediaries such as insurance companies,
housing finance companies, unit trusts and investment
companies.

 Another group of participants in the financial
system comprises the individuals and
institutions who facilitate the trading or
exchange process in the system.

 Stock Exchanges: A stock exchange is an institution
where securities that have already been issued are bought
and sold. Presently there are 23 stock exchanges in India,
the most important ones being the NSE and BSE.
 Listed Securities: Securities that are listed on various
stock exchanges and hence eligible for being traded there
are called listed securities. Presently about 10000
securities are listed on all the stock exchanges in India put
together.

 Depositories: A depository is an institution
which dematerializes physical certificates and
effects transfer of ownership be electronic
book entries. Presently there are two
depositories in India, viz., the National
Securities Depository Limited (NSDL) and the
Central Securities Depository Limited (CSDL).

 Brokers: Brokers are registered members of
the stock exchanges through whom investors
transact. There are about 10000 brokers in
India.
 Foreign Institutional Investor (FII): Institutional
investors from abroad who are registered with
SEBI to operate in the Indian capital market are
called foreign institutional investors.

 Merchant Bankers: Firms that specialize in
managing the issue of securities are called
merchant bankers. They have to be
registered with SEBI.
 Primary Dealers: Appointed by the RBI,
primary dealers serve as underwriters in the
primary market and as market makers in the
secondary market for government securities.

Participants in the Financial
Market
 Mutual funds: A mutual fund is a vehicle for
collective investment. It pools and manages
the funds of investors.
 Custodians: A custodian looks after the
investment back office of a mutual fund. It
receives and delivers securities, collects
income, distributes dividends, and segregates
the assets between schemes.

 Registrars: Also known as a transfer agent, a
registrar is employed by a company or a mutual fund
to handle all investor-related services.
 Underwriters: An underwriter agrees to subscribe to
a given number of shares in the event the public
subscription is inadequate.
 Bankers to an Issue: The bankers to an issue
collect money on behalf of the company from the
applicants.

 Debenture Trustees: When debentures are
issued by a company, a debenture trustee has to
be appointed to ensure that the borrowing firm
fulfills its contractual obligations.
 Credit Rating Agencies: A credit rating agency
assigns ratings primarily to debt securities.

Regulatory Environment
 The financial system in a country is subject to a set of
regulations in the form of various Acts passed by the
legislative bodies.
 The regulatory environment may differ from one
country to another.
 In India, the Ministry of Finance, the RBI, The SEBI,
etc. are the major regulatory bodies exercising
regulatory control and supervision over the functioning
of the financial system in the country.

Regulatory Environment
 The securities issued may be traded or
exchanged between investors in securities
markets with the help of intermediaries, within
the regulatory framework approved by the
Government and other regulatory bodies.

Primary Market / New Issue Market
 New securities are directly issued by the issuing
companies to the investors.
 All the participants in this process of issuing new
shares to investors together constitute the
primary market or new issue market.
 When a new company is floated, its shares are
issued to the public in the primary market as an
Initial Public Offer (IPO).

Primary Market / New Issue Market
 The NIM does not have a physical
structure or form.
 All the agencies which provide the
facilities and participate in the process of
selling new issues to the investors
constitute the NIM.

Underwriting
 Underwriting is the activity of providing a
guarantee to the issuer to ensure successful
marketing of the issue.
 An underwriter is an individual or institution
which gives an undertaking to the stock issuing
company to purchase a specified number of
shares of the company in the event of a
shortfall in the subscription to the new issue.

Public Issue
 It involves sale of securities to members of the
public.
 The issuing company makes an offer for sale to
the public directly of a fixed number of shares at
a specific price.
 The offer is made through a legal document
called prospectus.
 Public issues are mostly underwritten by strong
public financial institutions.

Public Issue
 This is the most popular method for floating
securities in the new issue market.
 The company has to incur expenses on various
activities such as advertisements, printing of
prospectus, bank’s commission, underwriting
commission, agent’s fees, legal charges, etc.

Rights Issue
 The rights issue involves selling of securities
to the existing shareholders in proportion to
their current holding.
 As per Sec.81 of the Companies Act, 1956,
when a company issues additional equity
capital it has offered first to the existing
shareholders on pro rata basis.
 It is an inexpensive method of floatation of
shares as the offer is made through a formal
letter to the existing shareholders.

Private Placement
 A private placement is a sale of securities privately
by a company to a selected group of investors.
 The securities are normally placed, in a private
placement, with the institutional investors, mutual
funds or other financial institutions.
 A formal prospectus is not necessary in the case of
private placement.
 Underwriting arrangements are also not required in
private placement.
 This method is useful to small companies.

Pre-issue Tasks
 Selecting the intermediaries and entering into
agreements with them:
 Merchant Banker
 Registrar to an issue
 Share transfer agent
 Banker to an issue

Pre-issue Tasks
 Attending to other formalities:
The prospectus and application forms have to
be printed and despatched to all intermediaries
and brokers for wide circulation among the
investing public.
An initial listing application has to be filed with
the stock exchange where the issue is proposed
to be listed.

Post – issue Tasks
 Allotment letters and share certificates have to
be despatched to the allottees. Refund orders
have to be despatched to the applicants whose
applications are rejected.
 Shares have to be listed in the stock exchange
for trading.

Book Building
 The usual procedure of a public issue is through
the fixed price method where securities are
offered for subscription to the public at a fixed
price.
 An alternative method is now available which is
known as the book building process.
 SEBI announced guidelines for the book building
process, for the first time, in October 1995.

Book Building
 Under the book building process, the issue price is
not fixed in advance.
 It is determined by the offer of potential investors
about the price which they are willing to pay for the
issue.
 The price of the security is determined as the
weighted average at which the majority of investors
are willing to buy the security.
 Under the book building process, the issue price of
a security is determined by the demand and supply
forces in the capital market.

Role of Primary Market
 Primary market is the medium for raising fresh
capital in the form of equity and debt.
 It mops up resources from the public and
makes them available for meeting the long-term
capital requirements of corporate business and
industry.
 The primary market brings together the two
principal constituents of the market, namely the
investors and the seekers of the capital.

Role of Primary Market
 Capital formation takes place in the primary
market.
 The economic growth of country is possible
only through the primary market.

Regulation of Primary Market
 SEBI has been instrumental in bringing greater
transparency in capital issues.
 It has issued detailed guidelines to standardise
disclosure obligations of companies issuing securities.
 Companies floating public issues are now required to
disclose all relevant information affecting investor’s
interests.
 SEBI constantly reviews its guidelines to make them
more market friendly and investor friendly.

Stock Exchange
 Secondary market is the market in which
securities already issued by companies are
subsequently traded among investors.
 The secondary market where continuous trading
in securities takes place is the stock exchange.
 The stock exchange were once physical market
places where the agents of buyers and sellers
operated through the auction process.

Stock Exchange
 These are being replaced with electronic exchanges
where buyers and sellers are connected only by
computers over a telecommunications network.
 Auction trading is giving way to “screen-based”
trading where bid prices and offer prices (or ask
prices) are displayed on the computer screen.
 Bid price refers to the price at which an investor is
willing to buy the security.
 Offer price refers to the price at which an investor is
willing to sell the security.

Stock Exchange
 The bid-offer spread, the difference between the bid
price and the offer price constitutes his margin or profit.
 “ Stock exchange is a centralized market for buying
and selling stocks where the price is determined
through supply-demand mechanisms”.
 “ Stock exchange means any body of individuals,
whether incorporated or not, constituted for the
purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities”.

Functions of Stock Exchanges
 Maintains active trading: Shares are traded on the
stock exchanges, enabling the investors to buy and sell
securities. A continuous trading increases the liquidity or
marketability of the shares traded on the stock
exchanges.
 Fixation of prices: Price is determined by the
transactions that flow from investors demand and
suppliers preferences.
 Ensures safe and fair dealing: The rules, regulations
and by-laws of the stock exchanges provide a measure
of safety to the investors. Transactions are conducted
under competitive conditions enabling the investors to
get a fair deal.

Functions of Stock Exchanges
 Aids in financing the industry: A continuous
market for shares provides a favourable climate
for raising capital.
 Dissemination of information: Stock exchanges
provide information through their various
publications.
 Performance inducer: The prices of stocks
reflect the performance of the traded companies.
 Self-regulating organisation: The stock
exchanges monitor the integrity of the members,
brokers, listed companies and clients.

Stock Exchanges in India
 The origin of the stock exchanges in
India can be traced back to the later half
of 19th
century.
 An important early event in the
development of the stock market in India
was the formation of the Native Share
and Stock broker’s Association at
Bombay in 1875, the precursor of the
present day Bombay Stock Exchange.

 This was followed by the formation of
associations/exchanges in Ahmedabad
(1894), Calcutta (1908), and Madras (1937).
 In order to check development of the stock
market, the central government introduced
a legislation called the Securities Contracts
(Regulation) Act, 1956.
 Under this legislation, it is mandatory on
the part of a stock exchange to seek
governmental recognition.

 At present there were 23 stock exchanges
recognised by the central government.
 They are located at Ahmedabad, Bangalore,
Baroda, Bhubaneshwar, Calcutta, Chennai (the
Madras Stock Exchange), Cochin, Coimbatore,
Delhi, Guwahati, Hyderabad, Indore, Jaipur,
Kanpur, Ludhiana, Mangalore, Mumbai (The
Bombay Stock Exchange), Mumbai (the
National Stock Exchange), Mumbai (OTC
Exchanges of India), Patna, Pune, and Rajkot.

The Bombay Stock Exchange (BSE)
 The BSE is established in 1875.
 It is one of the oldest organised exchanges
in the world.
 The BSE switched from the open outcry
system to the screen-based system in 1995
which is called BOLT (BSE On Line Trading)
 To begin with, BOLT was a ‘quote-driven’ as
well as an ‘order-driven’ system, with jobbers
(specialists) feeding two-way quotes and
brokers feeding buy or sell orders.

The Bombay Stock Exchange (BSE)
 In October 1996 SEBI permitted BSE to
extend its BOLT network outside
Mumbai.
 The capacity of the Tandem hardware
of BOLT is 5, 00,000 trades per day.
 In 2002, subsidiary companies of 13
regional exchanges became members
of BSE .

The National Stock Exchange (NSE)
 The NSE is inaugurated in 1994.
 It seeks to (a) establish a nation-wide trading
facility for equities, debt and hybrids,
(b) facilitate equal access to investors across
the country,
© impart fairness, efficiency, and
transparency to transactions in securities,
(d) shorten settlement cycle, and
(e) meet international securities market
standards.

 The NSE is a national, computerised exchange.
 The NSE has two segments: the Capital Market
segment and the Wholesale Debt Market
segment.
 The capital market segment covers equities,
convertible debentures, and retail trade in non-
convertible debentures.
 The Wholesale debt market segment is a
market for a high value transactions in
government securities, PSU bonds, commercial
papers, and other debt instruments.

 The trading members in the capital market
segment are connected to the central computer
in Mumbai through a satellite link-up, using
VSATs (Very Small Aperture Terminals).
 NSE is the first exchange in the world to employ
the satellite technology.
 The NSE has opted for an order-driven system.
 When a trade takes place, a trade confirmation
slip is printed at the trading member’s work
station. It gives details like quantity, price, code
number of counterparty, and so on.

 Members are required to deliver securities and
cash by a certain day. The payout day is the
following day.
 All trades on NSE are guaranteed by the
National Securities Clearing Corporation
(NSCC).

Inter-connected Stock Exchange of
India (ISE)
 For the purpose of compete with the NSE and
BSE, the 14 regional stock exchanges ( excluding
Calcutta, Delhi, Ahmedabad, Ludhiana and Pune
stock exchanges) joined together and promoted a
new organisation called Inter-connected Stock
Exchange of India Ltd., (ISE) in 1998.
 The ISE was recognised as a stock exchange by
SEBI and it commenced trading in February, 1999.

Inter-connected Stock Exchange of
India (ISE)
 The objective of setting up ISE was to optimally utilize the
existing infrastructure and other resources of participating
stock exchanges.
 The ISE aims to provide cost-effective trading/connectivity to
all the members of the participating exchanges on a national
level.
 The trading settlement and funds transfer operations of the
ISE are completely automated.
 However, ISE has not succeeded in becoming a competitive
market force to BSE and NSE.

Over the Counter Exchange of India
(OTCEI)
 Over the Counter Exchange of India was started in
1992 after the role models of NASDAQ ( National
Association of Securities Dealers Automated
Quotation) and JASDAQ (Japanese Association of
Securities Dealers Automated Quotation).
 The OTCEI was started with the objective of
providing a market for the smaller companies that
could not afford the listing fees of the of the large
exchanges and did not fulfill the minimum capital
requirement for listing.

Regulations of Stock Exchanges
 There are Acts, rules, regulations, by-laws and
guidelines governing the functioning of secondary
markets or stock exchanges in the country.
 There is also a regulator in the form of the
Securities and Exchange Board of India (SEBI) to
oversee and monitor the functioning of both the
primary and secondary securities market in India.

 The Securities Contracts (Regulation) Act, 1956, and the
rules made under the Act, namely the Securities Contracts
(Regulation) Rules, 1957, constitute the main laws
governing stock exchanges in India.
 This Act provides for the direct and indirect control of
virtually all aspects of securities trading and the
functioning of stock exchanges.
 The provisions of the Securities contracts (Regulation)
Act, 1956, were administered by the Central Government.

 The Securities and Exchange Board of India was
constituted as an interim administrative body in 1988.
 SEBI was given a statutory status on 30th
January 1992.
 In April 1992, the SEBI Act was passed.
 In this Act it is stipulated that it shall be the duty of the
Board to protect the interests of investors in the
securities market and to promote the development of and
to regulate the securities market.

 The Board plays a dual role, namely a regulatory role and a
developmental role.
 The SEBI is constituted with six members, including the
chairman of the Board.
 Two members are officials of the central government
ministries of finance and law.
 One member is an official of the RBI
 Two members are professionals having experience or
special knowledge relating to securities market and are
appointed by the central government.

 The Board is empowered to regulate the business in
stock exchanges, to register and regulate the
working of stock market intermediaries.
 The Board is also authorised to prevent and prohibit
fraudulent and unfair trade practices in the market.
 Transparency and equal opportunity to all market
participants have been the goals of all
developmental and regulatory activities of SEBI.

 A stock exchange has the power to make by-laws
for the regulation and control of contracts entered
into by members.
 The Depositories Act, 1996 is another important
legislation affecting the functioning of stock
exchanges.
 The Depositories Act, 1996, was passed to change
over to the electronic mode of security transfer
through security depositories.

Trading System in Stock Exchanges
 Trading System: The system of trading prevailing in stock
exchanges for many years was known as floor trading.
In this system, trading took place through an open
outcry system on the trading floor or ring of the exchange
during official trading hours.
 Floor Trading: In floor trading, buyers and sellers transact
business face to face using a variety of signals.
Under this system, an investor desirous of buying a
security gets in touch with a broker and places a buy order
along with the money to buy the security. Similarly the
investor sells his shares.

 Screen based trading: In the new electronic stock
exchanges, which have a fully automated computerised
mode of trading, floor trading is replaced with a new
system of trading known as screen-based trading.
In this system the distant participants can trade with
each other through the computer network.
The screen-based trading systems are of two types.
1. Quote driven system
2. Order driven system

 Quote driven system: Under this system, the market-maker, who is the
dealer in a particular security, inputs two-way quotes into the system, that
is, his bid price (buying price) and offer price (selling price).
The market participants then place their orders based on the bid-offer
quotes.
These are then automatically matched by the system according to certain
rules.
 Order driven system: Under this system, clients place their buy and sell
orders with the brokers.
These are then fed into the system. The buy and sell orders are
automatically matched by the system according to predetermined rules.

FINANCIAL MARKET.pptx finance,drivatives

More Related Content

Similar to FINANCIAL MARKET.pptx finance,drivatives (20)

Recently uploaded (20)

FINANCIAL MARKET.pptx finance,drivatives