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WELL-COME

Learn about the two economic sectors, functions of financial markets, money market vs. capital market, market instruments, and primary and secondary markets. Understand the mechanisms and methods of allocation for savers, investors, and business firms.

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WELL-COME

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  1. WELL-COME

  2. FINANCIAL SYSTEM

  3. FINANCIAL SYSTEM BUSINESS FIRMS (Investors) FINANCIAL MARKETS BANKS HOUSEHOLD SECTOR (Savers)

  4. FINANCIAL MARKETS • In every economy, there are two main sectors: • 1. Households :- they save funds and are known as `Savers` • Business Firms :- they invest funds and are known as `Investors`. • Meaning of Financial Market:- • Financial market refers to whole network of all organisations and institutions that provides short, medium and long-term funds. In other words financial market refers to a platform which provide facilities to savers for save their money ,to investors for invest their money and to business firms for arrangement of requirement funds. • Allocative function of financial market refers to linking the savers and investors by mobilising funds between them.

  5. There are two mechanism, through which funds can be allocated or mobilised from household to business firm • Banks :- households can deposit their surplus funds with banks, who in term lend these funds to business firm. • Financial Markets :- households buy securities from the financial market to provide funds to business firms. • Functions of financial market:- • Provide liquidity to financial assets • Reduce the cost of transactions • Mobilise saving and channelise them into most productive uses • Facilities price discovery

  6. CLASSIFICATION OF FINANCIAL MARKET Money Market (trader in instruments with a maturity of less than one year) Capital Market (Trader in instruments with medium and long-term maturity) Primary Market Secondary Market

  7. MONEY MARKET :- Money Market refers to market for short-term funds, which deals in monetary assets whose period of maturity is up to one year. • MAJOR PARTICIPANTS OF MONEY MARKET:- • Reserve Bank of India (RBI)State Government • Non-Banking Finance Companies • Large Corporate Houses • Mutual Funds and. • Commercial Bank set. • MONEY MARKET INSTRUMENTS AR E:- • Highly liquid. • Less risky.

  8. INSTRUMENTS OF MONEY MARKET Treasury Bill Commercial Paper Call Money Certificate of deposit Commercial Bill

  9. Instruments' of money market • Treasury Bill:- A treasury bill is an instrument of short-term borrowing issued by Reserve Bank of India (RBI) on behalf of Indian Government. They are also known as Zero Coupon Bondsand are sold to the bank and public. They are freely transferable. • They are available for a minimum amount of Rs. 25,000 and in multiples thereof.

  10. 2. Commercial Paper:- Commercial paper (CP) is an unsecured instrument is the form of a promissory note. It is issued only by large creditworthy companies. It usually has a maturity period of 15 days to one year. It is sold at a discount and redeemed at par CP can be issued in denominations of Rs. 5 lakh or multiples thereof.

  11. 3.Call Money:- call money is short term finance, whose maturity varies from 1 day to 15 days. Call money is used by Banks to maintain the CRR As per RBI guidelines, commercial banks are required to maintain a minimum cash balance with them, known as Cash Reserve Ratio. 4. Certificate of Deposit :- It is a bearer document issued by commercial banks and development financial institutions against the deposit kept by companies and institutions. The time period of CD ranges from 91 days to one year. 5. Commercial Bill :-It is short-term instrument used by business firms to finance their working capital requirements. It is also known as trade Bill ( commonly used in credit purchases and credit sales. If the bill is accepted by commercial banks, then it is known as commercial bill.

  12. CAPITEL MARKET :- • capital Market refers to whole network of all organisation, institutions and instruments that provide medium and long-term funds. • The instruments are used in the capital market are :- • Shares • Debentures • Bonds • Public deposits etc. • Features of capital market And money market • Participant • Duration • Liquidity • Safety • Expected return

  13. DIFFERENCE BETWEEN CAPITAL MARKET AND MONEY MARKET

  14. COMPONENTS OF CAPITAL MARKET PRIMARY MARKET (primary market refers to the market wherein securities are sold for the first time.) SECONDARY MARKET (secondary market refers to market for sale and purchase of previously issued securities.)

  15. PrimaryMARKET MECHANISM

  16. Secondary market Mechanism

  17. METHOD OF FLOATATION • Offer through prospectus:- Under this method ,company invites public to apply for its securities through issue of prospectus. • Offer for sale:-Under this method, securities are not issued directly to the public. They are first issued to intermediaries like issue house and stock brokers at a fixed price. • Private placement:- Under this method, company sells the securities to the some selected institutional investors and individuals. • Right Issue :- Under this method, company offer the new shares to its existing shareholders in proportion of shares already held by him. • Note:- if the existing shareholders do not subscribe to the securities during the prescribed time, then the offer is opened for the general public • 5. E- IPOs :- Under this method, company issued capital to the public through online system of stock exchange

  18. STOCK EXCHANGE According to the Securities Contracts (Regulation) Act 1956, Stock Exchange refers to an institution or body of individuals (incorporated or not), which is constituted foe the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities. • Three-tier form of secondary market • Regional Stock Exchanges (There are 22 regional stock exchange) • National Stock exchange of India ( NSEI or NSE ) • Over the Counter Exchange of India ( OTCEI )

  19. Meaning of Stock Exchange :- Stock Exchange is a platform where dealings take place in share , debentures and bonds issued by the private sector companies, public enterprises, government etc. such shares, debentures and bonds are called securities • FUNCTION OF STOCK EXCHANGE • The main function performed by stock exchange are as follows:- • Providing liquidity and marketability to existing securities:- • Pricing of securities :- • Safety of transaction :- • Providing scope for speculation:- • Economic barometer :- • Spreading of equity Cult:- • Contributes to economic growth:-

  20. TRADING PROCEDURE ON A STOCK EXCHANGE • Sale and purchase of securities through stock exchange generally involves the following trading procedure:- • Selecting Broker:- • Selecting the Security:- • Placing the Order:- • Executing Order:- • Contract Note:- • Settlement:-

  21. NATIONAL STOCK EXCHANGE OF INDIA ( NSEI ORNSE ) NSEI was incorporated in 1992 and started its operation in 1994. it lunched capital market segment in 1994 and the futures and options segment in 2000 for various derivative instruments. NSE was setup by leading financial institutions, banks, insurance companies and other financial intermediaries. It is managed by senior executive from promoter institutions and eminent professionals, who do not directly or indirectly trade on exchange. Investors sell and

  22. Objectives of NSE • To establish a nationwide trading facility for types of securities. • To provide fair, efficient and transparent securities market using electronic trading system. • To meet international benchmarks and standards. • To enable shorter settlement cycles and book entry settlements. • To ensure equal access to investors all over the country through an appropriate communication network. • Within a period of ten years, NSE has been able to achieve its objectives for which it was set up. It has been able to provide:- • Equal access to investors across the country at the lowest cost. • High degree of transparency in trading. • Nationwide screen based automated trading system. • International standards through technological advancements.

  23. MARKET SEGMENT OF NSEI NSEI provides trading in two segments of securities:- Whole sale Debt Market Segment: This segment provides a trading platform for a wide range of fixed income securities. such as Central Government securities, treasury bills, commercial paper ,CP, mutual funds bonds etc. Capital Market Segment: This segment provides a trading platform for equity shares, preference shares, debentures exchange traded funds as well as retail Government securities.

  24. OVER THE COUNTER EXCHANGE OF INDIA ( OTCEI ) OTCEI is company incorporated in 1990 under the Companies act 1956. it commenced trading in 1992 . It is fully computrised, transparent, single window exchange. Over thee counter or OTC market may be defined as a place where buyers seek seller and vice-versa and then attempt to arrange terms and conditions for purchase or sale acceptable to both the parties. The trading procedure at OTC is based on three steps:- Go to an OTC counter; Find quotes on the computer screen; Make a purchase or sale, if prices meet the target.

  25. COMMON FEATURE OF NSEI AND OTCEI Incorporate Entities: Nationwide coverage :- No Trading floor:- Screen Based Trading:- Transparent Market:-

  26. SECURITIES AND EXCHANGE BOARD OF INDIA ( SEBI ) SEBI was established by Indian government in 1988 under the administrative control of the Finance Ministry. Later it become a statutory body having perpetual succession and a common seal under the Securities and Exchange Board of India Act,1992.

  27. Reason for the establishment of SEBI • In 1980, the capital market witnessed a tremendous growth due to increasing participation of the public. The increasing number of investor`s population ,its resulted in variety of malpractices by companies, brokers, merchant bankers etc. • Some example of malpractices include:- • Unofficial private placement; • Unofficial premium on new issue; • violation of rules and regulations of Stock exchange; • Delay in delivery of securities • Rigging of prices • Not-followed of provision of companies Act.

  28. Purpose and role of SEBI The basic purpose of SEBI is to facilitate efficient mobilisation and allocation of resources through securities market. It also aims to stimulate competition and encourage innovation Basically,SEBI aims to meet the need of the three groups of securities market: Issuers:- It aims to provide a market in which they can confidently raise finance in an easy, fair and efficient manner Investors:- It aims to provide protection to their rights and interests through adequate, accurate and authentic information Intermediaries:- it aims to offer a competitive, professionalized and expanding market with adequate and efficient infrastructure.

  29. Functions of SEBI • SEBI was set up to perform three basic function: • Regulatory Function :-to regulate the functioning of securities market • Registration of brokers and sub-brokers and other players in the market. • Regulation of takeover bids by companies. • Registration of collective investment schemes and mutual funds. • 2. Development Function :-to promote the development of securities market. • Training of intermediaries of the securities market. • Conducting research and publishing information useful to all market participants. • Undertaking measures to develop the capital markets by adapting a flexible approach • 3. Protective function :- to protect the interests of the investors. • Undertaking steps for investor protection. • Promotion of fair practices and code of conduct in securities market. • Controlling insider trading and imposing penalties for such practices.

  30. Organization Structure of SEBI SEBI has divided its activities into five operational departments and each department is headed by an executive director SEBI` head office is at Mumbai and has opened regional offices in Kolkata, Chennai and Delhi in order to attend investor's complaints and to coordinate with issue, intermediaries and stock exchanges. SEBI also formed two advisory Committees Primary Market advisory committee; and Secondary Market advisory committee.

  31. Objective of two committees:- To advise SEBI to regulate intermediaries for ensuring investors protection in the primary market. To advise SEBI on disclosure requirements for companies. To advise SEBI on issue related to development of primary market To advice SEBI on matters related to development and regulation of secondary market in the country.

  32. SUMMARY Financial Market is a market for creation and exchange of financial assets. It helps in mobilisation and channelising the savings into most productive uses. Financial markets also helps in price discovery and provide liquidity to financial assets. Money Market is a market for short-term funds. It deals in monetory assets whose period of maturity is less than one year. The instruments of money market includes treasury bills, commercial paper, call money, REPO’s, Certificate of deposit, commercial bills, participation certificates and money market mutual funds. Capital Market is a place where long-term funds are mobilised by the corporate undertakings and Government. Capital Market may be devided into primary market and secondary market. Primary market deals with new securities which were not previously tradable to the public. Secondary market is a place where existing securities are bought and sold.

  33. Stock Exchanges are the organisations which provide a platform for buying and selling of existing securities. Stock exchanges provide continuous market for securities, helps in price discovery, widening share ownership and provide scope for speculation. The National Stock Exchange of India is the latest, most modern and technology driven exchange and was incorporated in 1992. OTCEI was incorporated in 1992 to provide listing facility for small companies with paid up capital of less than 3 crores. Securities and Exchange Board of India was established in 1988 and was given statutory status through an Act in 1992. The SEBI was set-up to protect the interests of investors, development and regulation of securities market.

  34. Projects and Assignments 1. Collect the information about the companies that have mobilized resources through primary market. 2. Collect the information on various measures taken by SEBI to protect the interests of investors since its inception.

  35. CBSE QUESTION Q.1 What does the abbreviation .SEBI. Stand for? Explain the term sensex. How many shares constitute sensex? (4) Q.2 Define primary market. State any two methods of issuing securities in primary market. (4) Q.3 Nature of money market can be well explained with the help of its features. State any three such feature of money market. 3 Q.4 Distinguish between ‘Capital Market’ and ‘Money Market’ on the following bases: 5 (i) Participants (ii) Instruments traded (iii) Duration of securities traded (iv) Expected return (v) Safety Q.5 What is meant by ‘money market’ ? Briefly explain the concept of ‘call money’. 4 Q.6 What is meant by a ‘Primary Market’ ? Briefly explain the concept of ‘Initial Public Offer.’ 4 Q7 Distinguish between Capital market and Money market on the basis of (i) Participants, (ii) Instruments traded (iii) Investment outlay, and (iv) Safety

  36. Q.8 "Securities and Exchange Board of India (SEBI) is the watchdog of the securities market." Do you agree ? Give four reasons in support of your answer. 4 Q.9 State any three objectives of National Stock Exchange. 3 Q.10 Explain any five functions of a Stock Exchange. 5 Q.11 What is meant by ‘Primary Market’ ? Briefly explain the concept of ‘Rights issue for existing companies’. 4 Q.12 What is meant by ‘stock exchange’ ? Briefly explain any three of its functions. 4 Q.13 Distinguish between ‘primary’ and ‘secondary’ markets. 4 Q.14 Briefly explain the concept of ‘preferential issue’ and ‘private placement’ of shares. 4

  37. TOPIC – FINANCIAL MANAGEMENT/BUSINESS FINANCE(Quiz) Q.No.1 Other things remaining the same, an increase in the tax rate on corporate profit will a. make debt relatively cheaper b. Make debt relatively less cheap at home c. No impact on the cost of debt d. we can’t say . Q.No.2. Companies with higher growth paternal are likely to : a. Pay lower dividends b. Pay higher dividends c. Dividends are not affected by growth considerations d. None of the above . Q.No.3 Higher dividends per share is associated with. a. High earnings, high cash flows, unstable earnings and higher growth opportunities b. High earnings, high cash flows, stable earnings and high growth opportunities. C. High earnings , high cash flows , stable earnings and lower growth opportunities. D. High earnings, low cash flows, stable earnings and lower growth opportunities. Q.No.4 A fixed asset should be financed through a. A long term liability b. A short term liability c. A mix of long and short term liabilities . Q.No.5 Higher working capital usually results in a. Higher current ratio, Lower risk and lower profits b. lower current ratio, higher risk and profit c. higher equitably , lower risk and lower profits d. lower equitably, lower risk and higher profits .

  38. Q.No.6 Financial leverage is called favorable if a. Return on investment is lower than cost of debt b. ROI is higher than cost of debt c. debt is nearly available d. if the degree of existing financial leverage is low. Q.No.7 Current assets of a business firm should be financed through a. A current liability only b. Long term liability only c. partly from both types i.e., loan and short – term liabilities Q.No.8 A decision to acquire a new and modern plant to upgrade an old one is a. financing decision b. equity share capital c. investment decision d. dividend decision . Q.No.9.Financial planning arrives at a. Minimizing the external borrowing by resorting to equity share b. ensuring that the firm always have significantly more funds than required so that there is no paucity> of funds c. ensuring that the firm faces neither a shortage nor a glut of unusable funds Q.No.10 Current assets are those assets which get converted into cash a. Within six months b. within one year c. between one and three years .

  39. QUIZ TOPIC - FINANCIAL MARKETS Q.No.1Primary and Secondary Markets a. Compete with each other b. Complement each other c. Function independently d. Control each other . Q.No.2 OTCEI was started on the lines of a. NASDAQ b. NYSE c. NASAQ d. NSE. Q.No.3 National stock exchange of India was recognized as stock exchange in the year a. 1992 b. 1993 c. 1994 d. 2002. Q.No4. Clearing and settlement operations of NSE is carried out by a. NSDL b. NSCCL c. SEBI d. CDSL Q.No.5 Treasury Bills are basically a. An instrument to borrow short – term funds b. An instrument to borrow long- term c. An instrument of capital market d. None of the above. Q.No.6 Which is not a short term instrument ( Security) a. Treasury Bill (T-Bill) b. Certificate of deposit (CD) c. Commercial Bill (Trade bill)d, debentures

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