Business Studies Ii Chapter 10 Financial Markets

Financial market means the market that creates and exchanges financial assets. When companies issue shares, debentures, etc. it is called creation of financial assets while their sale-purchase in the financial market is called exchange.

Functions: Financial market gives strength to economy by making finance available at the right place. Following are its main functions:

(i) Mobilisation of savings and their Channelisation into more Productive Uses:

Financial market gives impetus to the savings of the people. This market takes the uselessly lying finance in the form of cash to places where it is really needed. Many financial instruments are made available for transferring finance from one side to the other side. The investors can invest in any of these instruments according to their wish.

(ii) Facilitates Price Discovery: The price of any good or service is determined by the forces of demand and supply. Like goods and services, the investors also try to discover the price of their securities. The financial market is helpful to the investors in giving them proper price.

(iii) Provides Liquidity to Financial Assets: This is a market where the buyers and the sellers of all the securities are available all the times. This is the reason that it provides liquidity to securities. It means that the investors can invest their money, whenever they desire, in securities through the medium of financial market. They can also convert their investment into money whenever they so desire.

(iv) Reduces the cost of Transactions: Various types of information is needed while buying and selling securities. Much time and money is spent in obtaining it. The financial market makes available every type of information without spending any money. In this way, the financial market reduces the cost of transactions.

The demand and supply of finance usually includes the following:

It refers to the market that creates and exchanges financial assets.

It refers to the financial instruments or securities, e.g., shares, debentures, treasury bills, commercial papers, etc.

Following is the brief description of money market instruments:

(i) Treasury Bill: Treasury Bill means that short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short-term financial needs. Usually their maturity period is 14 days, 91 days. 182 days and 364 days. Treasury bills are of highly liquid nature because the RBI is ever-ready to buy them on discount. They are issued at less than the face value while the payment is made at the face value.

(ii) Commercial Paper (CP): Commercial Papers are those unsecured Promissory Notes which are issued by well-reputed companies. The minimum face value of a commercial paper is five lakh rupees. It is used to meet the demand of a short-term seasonal need and the requirement of working capital. They are issued for a period of 15 days to 12 months.

(iii) Call Money or Call Loans: Call loan means that loan document for which the payment can be made at a short notice either by the borrower or the lender. Under this, the maturity period of the loan is between 1 and 15 days. The lowest amount of this instrument is rupees 10 crore. They are generally used by the banks for the following reasons:

(a) To control the Statutory Liquidity Ratio - (SLR).

(b) To invest cash, more than what is needed, for short term.

(iv) Certificate of Deposit (CD): Certificate of deposit is a negotiable instrument which can be transferred after a certain period by an endorsement. It is issued by the Scheduled Commercial Banks and the Indian Financial Institutions like IDBI, IFCI, ICICI, SIDBI and EXIM Bank. They are issued for a period ranging between 91 days and one year. They are issued on discount. An investor can transfer the certificates of deposits after a lapse of 45 days by an endorsement to any person.

(v) Commercial Bill: It is a negotiable instrument which can be easily transferred. It is used to finance the credit sales. The seller (drawer) draws the bill and the buyer (drawee) accepts it. The buyer honours the bill on the due date. If the seller needs money before the due date, he can get the bill discounted from the bank. It is a short-term instrument, generally, issued for a period of 90 days.

Meaning: Money market is that market where transactions are made in short-term securities which are in the form of near money. It brings together the lenders who have surplus short-term investible funds and the borrowers who are in need of funds for the short-term. In this market funds can be borrowed for a short-period varying from a day, a week, a month, or 3 to 12 months and against a variety of instruments.

Money Market Instruments:

(i) Treasury Bill

(ii) Commercial Paper

(iii) Call Money or Call Loans

(iv) Certificate of Deposits

Money market is that market where transactions are made in short term securities. It means those securities where the payment period is upto one year. Since their maturity period is very short, they are also called Near Money. These securities include chiefly Call Money, Treasury Bills, Commercial Bills, Certificate of Deposit, Commercial Paper, etc.

Treasury Bill: Treasury Bill means that short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short-term financial needs. Usually their maturity period is 14 days, 91 days. 182 days and 364 days. Treasury bills are of highly liquid nature because the RBI is ever-ready to buy them on discount. They are issued at less than the face value while the payment is made at the face value.
Trade Bill: It is a negotiable instrument which can be easily transferred. It is used to finance the credit sales. The seller (drawer) draws the bill and the buyer (drawee) accepts it. The buyer honours the bill on the due date. If the seller needs money before the due date, he can get the bill discounted from the bank. It is a short-term instrument, generally, issued for a period of 90 days.

Commercial Paper (CP): Commercial Papers are those unsecured Promissory Notes which are issued by well-reputed companies. The minimum face value of a commercial paper is five lakh rupees. It is used to meet the demand of a short-term seasonal need and the requirement of working capital. They are issued for a period of 15 days to 12 months.
Certificate of Deposit (CD): Certificate of deposit is a negotiable instrument which can be transferred after a certain period by an endorsement. It is issued by the Scheduled Commercial Banks and the Indian Financial Institutions like IDBI, IFCI, ICICI, SIDBI and EXIM Bank. They are issued for a period ranging between 91 days and one year. They are issued on discount. An investor can transfer the certificates of deposits after a lapse of 45 days by an endorsement to any person.

It refers to that market where transactions in short-term securities are made.

(i) Brokerage and (ii) Underwriting Commission.

(i) Banks and (ii) Insurance Companies.

All short-term securities are known as near money.

Call money market.

The money market establishes a balance between the short-term financial supply and short-term financial demand.

Zero Coupon Bond means a financial instrument for which no interest is paid but it is issued at a discount.

(i) Capital Market: Capital market means that market where transactions in long-term securities are made. This market offers help in meeting the long-term financial needs of various sectors of economy. Transaction of securities in this market include primarily the shares and debentures. This market encourages people to invest their small savings in productive activities. On the one hand, people earn appropriately and on the other hand, the economy develops.

(ii) Primary Market: Primary market is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues. Therefore, the primary market is also called New Issue Market (NIM). Through the medium of this market both the newly established companies as well as the existing companies collect capital. In this market, the flow of funds is from savers to borrowers (Industries).

(iii) Secondary Market: The secondary market is that market in which the buying and selling of the previously issued securities is done. When a security is sold for the first time, it is the activity of the primary market. However, when the same security is sold for the second time, it is the activity of the secondary market. The transactions of the secondary market are generally done through the medium of stock exchange. The chief purpose of the secondary market is to create liquidity in securities.

Primary Market: Primary market is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues. Therefore, the primary market is also called New Issue Market (NIM). Through the medium of this market both the newly established companies as well as the existing companies collect capital. In this market, the flow of funds is from savers to borrowers (Industries).

Secondary Market: The secondary market is that market in which the buying and selling of the previously issued securities is done. When a security is sold for the first time, it is the activity of the primary market. However, when the same security is sold for the second time, it is the activity of the secondary market. The transactions of the secondary market are generally done through the medium of stock exchange. The chief purpose of the secondary market is to create liquidity in securities.

Following are the methods of raising capital in the primary market:

(i) Public Issue: Under this method, the company issues a prospectus and invites the general public to purchase shares or debentures.

(ii) Offer for Sale: Under this method, firstly the new securities are offered to an intermediary (generally firms of stock brokers) at a fixed price. They further resell the same to the general public at a higher price. The advantage of doing this is that the issuing company feels free from the tedious work of making a public issue.

(iii) Private Placement: Under this method, the company sells securities to the big financial institutions or brokers instead of selling them to the general public. They, in turn, sell these securities to the selected clients at a higher price. This method is preferred as it is a cheaper method of raising funds as compared to a public issue.

(iv) Right Issue: This method is used by those companies who have already issued their shares. When an existing company issues new shares, first of all it invites its existing shareholders. This issue is called the right issue. In this case, the shareholder has the right either to accept the offer for himself or assign a part or all of his rights in favour of another.

(v) Electronic Initial Public Issue (e-IPOs): Under this method, companies issue their securities through the electronic medium (i.e., internet). The company issuing securities through this medium enters into a contract with a Stock Exchange. SEBI registered broker have to be appointed for the objective of accepting applications. This broker regularly sends information about it to the company. The company issuing security also appoints a Registrar, who helps in making the issue a success by establishing contact with the stock exchange.

Primary Market: Primary market is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues. Therefore, the primary market is also called New Issue Market (NIM). Through the medium of this market both the newly established companies as well as the existing companies collect capital. In this market, the flow of funds is from savers to borrowers (Industries).
Right Issue: This method is used by those companies who have already issued their shares. When an existing company issues new shares, first of all it invites its existing shareholders. This issue is called the right issue. In this case, the shareholder has the right either to accept the offer for himself or assign a part or all of his rights in favour of another.

Primary Market: Primary market is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues. Therefore, the primary market is also called New Issue Market (NIM). Through the medium of this market both the newly established companies as well as the existing companies collect capital. In this market, the flow of funds is from savers to borrowers (Industries).
Initial Public Offer-IPO: It refers to the first issue of equity shares to the public. The IPO can be made through any of the following methods:

(i) Public Issue: Under this method, the company issues a prospectus and invites the general public to purchase shares or debentures.

(ii) Offer for Sale: Under this method, firstly the new securities are offered to an intermediary (generally firms of stock brokers) at a fixed price. They further resell the same to the general public at a higher price. The advantage of doing this is that the issuing company feels free from the tedious work of making a public issue.

(iii) Private Placement: Under this method, the company sells securities to the big financial institutions or brokers instead of selling them to the general public. They, in turn, sell these securities to the selected clients at a higher price. This method is preferred as it is a cheaper method of raising funds as compared to a public issue.

 The chief features of primary market are the following:

(i) It is related with New Issues: The first important feature of the primary market is that it is related with the new issues. Whenever a company issues new shares or debentures, it is known as Initial Public Offer - (IPO).

(ii) It has no Particular Place: Primary market is not the name of any particular place but the activity of bringing in new issues is called the primary market.

(iii) It comes before Secondary Market: The transactions are first made in the primary market. The turn of the secondary market comes later.

The chief features of the secondary market are the following:

(i) It creates Liquidity: The most important feature of the secondary market is to create liquidity in securities. Liquidity means immediate conversion of securities into cash. This job is performed by the secondary market.

(ii) It comes after Primary Market: Any new security cannot be sold for the first time in the secondary market. New securities are first sold in the primary market and thereafter comes the turn of the secondary market.

(iii) It has a Particular Place: The secondary market has a particular place which is called Stock Exchange. However, it must be noted that it is not essential that all the buying and selling of securities will be done only through stock exchange. Two individuals can buy or sell them mutually. This will also be called a transaction of the secondary market. Generally, most of the transactions are made through the medium of stock exchange.

Difference between Primary Market and Secondary Market:

Capital Market: It refers to that market where transactions in long-term securities are made.

(i) Primary Market: It refers to that market in which securities are sold for the first time for collecting long-term capital.

(ii) Secondary Market: It refers to that market in which existing securities are bought and sold.

It refers to the market where transactions in long-term securities are made.

(i) Primary Market and (ii) Secondary Market.

More than one year.

It refers to the market in which securities are sold for the first time for collecting long-term capital.

It refers to the market which deals in previously issued securities.

The directors should approach to the consultant for new public issue of shares as this is the case of primary market. The stock exchange is only meant for securities already issued. Following are the methods which the company may adopt for the new public issue of shares:

(i) Public Issue: Under this method, the company issues a prospectus and invites the general public to purchase shares or debentures.

(ii) Offer for Sale: Under this method, firstly the new securities are offered to an intermediary (generally firms of stock brokers) at a fixed price. They further resell the same to the general public at a higher price. The advantage of doing this is that the issuing company feels free from the tedious work of making a public issue.

(iii) Private Placement: Under this method, the company sells securities to the big financial institutions or brokers instead of selling them to the general public. They, in turn, sell these securities to the selected clients at a higher price. This method is preferred as it is a cheaper method of raising funds as compared to a public issue.

(iv) Right Issue: This method is used by those companies who have already issued their shares. When an existing company issues new shares, first of all it invites its existing shareholders. This issue is called the right issue. In this case, the shareholder has the right either to accept the offer for himself or assign a part or all of his rights in favour of another.

(v) Electronic Initial Public Issue (e-IPOs): Under this method, companies issue their securities through the electronic medium (i.e., internet). The company issuing securities through this medium enters into a contract with a Stock Exchange. SEBI registered broker have to be appointed for the objective of accepting applications. This broker regularly sends information about it to the company. The company issuing security also appoints a Registrar, who helps in making the issue a success by establishing contact with the stock exchange.

Treasury Bill means that short term instrument which the Central Government issues to the financial institutions or the general public in order to meet its short-term financial needs. Usually their maturity period is 14 days, 91 days. 182 days and 364 days. Treasury bills are of highly liquid nature because the RBI is ever-ready to buy them on discount. They are issued at less than the face value while the payment is made at the face value.

Meaning: It refers to an organised market where securities issued by companies, government organisations and semi-government organisations are sold and purchased. Securities include shares, debentures etc.

Functions: The main functions performed by Stock Exchange are as follows:

(i) Providing Liquidity and Marketability to Existing Securities: Stock Exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increase their marketability and enhance the liquidity in investment of money.

(ii) Pricing of Securities: A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.

(iii) Safety of Transactions: Stock Exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and any member found violating them, his membership is cancelled.

(iv) Contributes to Economic Growth: Stock Exchange provides liquidity to securities. This gives the investor a double benefit — first, the benefit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the existing market price at any time. These advantages provided by the share market encourage the people to invest their money in securities. In this way, people's money gets invested in industries and economic development becomes possible.

Functions: The main functions performed by Stock Exchange are as follows:

(i) Providing Liquidity and Marketability to Existing Securities: Stock Exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increase their marketability and enhance the liquidity in investment of money.

(ii) Pricing of Securities: A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.

(iii) Safety of Transactions: Stock Exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and any member found violating them, his membership is cancelled.

(iv) Contributes to Economic Growth: Stock Exchange provides liquidity to securities. This gives the investor a double benefit—first, the benefit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the existing market price at any time. These advantages provided by the share market encourage the people to invest their money in securities. In this way, people's money gets invested in industries and economic development becomes possible.

Functions: The main functions performed by Stock Exchange are as follows:

(i) Providing Liquidity and Marketability to Existing Securities: Stock Exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increase their marketability and enhance the liquidity in investment of money.

(ii) Pricing of Securities: A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.

(iii) Safety of Transactions: Stock Exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and any member found violating them, his membership is cancelled.

(iv) Contributes to Economic Growth: Stock Exchange provides liquidity to securities. This gives the investor a double benefit—first, the benefit of the change in the market price of securities can be taken advantage of, and secondly, in case of need for money they can be sold at the existing market price at any time. These advantages provided by the share market encourage the people to invest their money in securities. In this way, people's money gets invested in industries and economic development becomes possible.
(v) Providing Scope for Speculation: When securities are purchased with a view to getting profit as a result of change in their market price, it is called speculation. It is allowed or permitted under the provisions of the relevant Act. It is accepted that in order to provide liquidity to securities, some scope for speculation must be allowed. The share market provides this facility.

The selling and buying procedure of securities on the Stock Exchange is as under:

1. Selection of broker: The first step is to select a broker who will buy/sell securities on behalf of the investor. This is necessary because trading of securities can only be done through SEBI registered brokers who are the members of a stock exchange. 
2. Opening D’mat Account: When a person wants to deal in shares of any company he/she has to open D’mat account with the depository participant. It facilitates trading in shares.
3. Placing the Order: First of all the person buying or selling securities places an order. In this order, he tells the name of the company whose security he is ready to buy or sell at what price, in what quantity and for what period of time.
4. Conveying the Message to Computer: This is the moment when the terminal operator receives the order from the customer and he feeds it in the computer. All the terminals of the NSEI established throughout the country go on feeding their computers continuously.
5. Starting of Matching Process: The moment the computer receives orders, it starts the process of matching. During the process of matching orders, the best matching of the selling or buying order is sought to be found out.
6.  Accepting the Order: As soon as the best matching of the buying and selling orders is established during the process of matching orders, its list is immediately obtained on the computer screen. This information tells us at what rate, time and with what party your order has been transacted.
7. Delivery and Payment: After the transaction has been settled, the delivery and payment are made according to the rules on the stock exchange.

According to Pyle, “Stock Exchanges are market places where securities that have been listed thereon, may be bought and sold for either investment or speculation.” It refers to an organised market where securities issued by companies, government organisations and semi-government organisations are sold and purchased. Securities include shares, debentures, bonds etc. Stock exchange shows the industrial development of a country which provides information about economic development of country. Hence, stock exchange is also known as barometer of economic development.

It is known as SENSEX.

It is known as NIFTY.

Providing liquidity and marketability to existing securities.

Meaning: It refers to that service through which the transfer of ownership in shares takes place by means of book entry without the physical movement of shares. Participants:

(i) The Depository: A depository is an institution which holds the shares of an investor in electronic form. It facilitates transactions in securities simply by means of book entry. At present, there are two depository institutions in India:

— National Securities Depository Limited (NSDL)

— Central Depository Services Limited (CDSL)

(ii) The Depository Participant: A Depository Participant (DP) is an agent of the depository. He functions as a mediator between the issuing company and the investors through the depository. He opens the accounts and maintains the securities account balance of the investors and conveys them the status of their holding from time to time. As per SEBI guidelines, banks, stock brokers, etc. can become depository participants.

(iii) The Investor: He is a person who wants to deal in shares and whose name is recorded with a depository. The investor is the real owner of the shares who has lodged them with the depository through book entry till the day he sells them.

(iv) The Issuing Company: The issuing company is that organisation which issues the securities. The issuing company send a list of the shareholders to the depositories.

Meaning: It refers to that account which is opened by the investors with depository participant to facilitate trading in shares. Advantages:

(i) Exemption of stamp duty for dealing in shares in the electronic form

(ii) Elimination of problems associated with transfer of shares in physical form (such as loss in transit, theft, delays, mutilation, etc.

(iii) The concept of ‘odd lot’ stands abolished

(iv) Increased liquidity through speedy settlement

(v) Reduction in paper work

(vi) Attract foreign investors and promoting foreign investment.

(i) The Depository: A depository is an institution which holds the shares of an investor in electronic form. It facilitates transactions in securities simply by means of book entry. At present, there are two depository institutions in India:

— National Securities Depository Limited (NSDL)

— Central Depository Services Limited (CDSL)

(ii) The Depository Participant: A Depository Participant (DP) is an agent of the depository. He functions as a mediator between the issuing company and the investors through the depository. He opens the accounts and maintains the securities account balance of the investors and conveys them the status of their holding from time to time. As per SEBI guidelines, banks, stock brokers, etc. can become depository participants.

(iii) The Investor: He is a person who wants to deal in shares and whose name is recorded with a depository. The investor is the real owner of the shares who has lodged them with the depository through book entry till the day he sells them.

(iv) The Issuing Company: The issuing company is that organisation which issues the securities. The issuing company send a list of the shareholders to the depositories.

Benefits:

(i) Exemption of stamp duty for dealing in shares in the electronic form

(ii) Elimination of problems associated with transfer of shares in physical form (such as loss in transit, theft, delays, mutilation, etc.

(iii) The concept of ‘odd lot’ stands abolished

(iv) Increased liquidity through speedy settlement

(v) Reduction in paper work

(vi) Attract foreign investors and promoting foreign investment.

Depository Services:

The depository services originated recently in the Indian Stock Market. Now-a-days on-line (scripless or paperless) trading in the shares of any company is compulsory. To make it a success some new trading mechanism is needed. Depository service is the name of that mechanism which makes possible the on-line trading in shares. Through this system transfer of ownership in shares take place by means of book entry without the physical delivery of shares. When a person wants to deal in shares of any company he/she has to open an account with the depository through a depository participant. Hence, there are four players who participate in this system. These are the following:
(i) The Depository

(ii) The Depository Participant

(iii) The Investor

(iv) The Issuing Company

The depository system is parallel to the banking system. A bank holds cash in accounts whereas a depository holds shares in accounts for its clients. A bank transfers cash between accounts whereas a depository transfers shares between accounts. In both the systems, the transfer of cash and shares takes place without the physical handling of cash or shares. Similarly, both the banks and the depositories are accountable for the safe custody of cash and shares respectively.

It refers to that service through which the transfer of ownership in shares takes place by means of book entry without the physical movement of shares.

National Securities Depository Limited (NSDL)

(i) Depository and (ii) Depository Participant.

He is depository participant.

It is book entry.

It refers to that account which is opened by the investors with depository participant to facilitate trading in shares.

It is electronic form.

Elimination of stamp duty.

The overall objective of SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market. This may be elaborated as follows:
1. To regulate stock exchanges and the securities industry to promote their orderly functioning.
2. To protect the rights and interests of investors, particularly individual investors and to guide and educate them.
3. To prevent trading malpractices and achieve a balance between self regulation by the securities industry and its statutory regulation.
4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc., with a view to making them competitive and professional.

The functions of SEBI can be divided into three parts:

I. Protective Functions: Following are the protective functions of SEBI:

(i) To check unfair trade practices (such as, to supply misleading statements to cheat the investors) in connection with security market.

(ii)To check insiders trading in securities. [Insider trading means the buying and selling of securities by those persons (Directors, Promoters, etc.) who have some secret information about the company and who wish to take the advantage of this secret information.)

(iii) To provide education relating to dealing in securities to the investors.

(iv) To promote code of conduct relating to security market.

II. Regulatory Functions: The following are the regulatory functions of the SEBI:

(i) To regulate the business being done in the share market.

(ii)To register brokers, sub-brokers, transfer agents, merchant banks, underwriters etc.

(iii) To register and regulate the credit rating agency.

(iv) To register and regulate the venture capital fund.
(v) To carry out audit of share markets.

III. Developmental Functions: The following are the developmental functions of the SEBI:

(i) To impart training to the intermediaries. (Intermediaries include share brokers, Sub-brokers, Share Transfer Agents, Issue Registrars, Merchant Bankers, Portfolio Managers, etc.)

(ii) To encourage self-regulating organisations.

(iii) To carry on research work.

(iv) To publish different kinds of information for the convenience of all the parties operating in the capital market.

SEBI was setup to control the stock exchanges and protects the interest of investors.Regulatory Functions: The following are the regulatory functions of the SEBI:

(i) To regulate the business being done in the share market.

(ii)To register brokers, sub-brokers, transfer agents, merchant banks, underwriters etc.

(iii) To register and regulate the credit rating agency.

(iv) To register and regulate the venture capital fund.
(v) To carry out audit of share markets.

Yes, I do agree with this statement as SEBI performs many protective functions for the securities market. They are the following:
Protective Functions: Following are the protective functions of SEBI:

(i) To check unfair trade practices (such as, to supply misleading statements to cheat the investors) in connection with security market.

(ii)To check insiders trading in securities. [Insider trading means the buying and selling of securities by those persons (Directors, Promoters, etc.) who have some secret information about the company and who wish to take the advantage of this secret information.)

(iii) To provide education relating to dealing in securities to the investors.

(iv) To promote code of conduct relating to security market.

The SEBI was set up to achieve the following objectives:

(i) Regulation of Stock Exchanges: The first objective of SEBI is to regulate stock exchanges so that efficient services may be provided to all the parties operating there.

(ii) Protection to the Investors: The capital market is meaningless in the absence of the investors. Therefore, it is important to protect the interests of the investors. The protection of the interests of the investors means protecting them from the wrong information given by the companies in their prospectus, reducing the risk of delivery and payment, etc. Hence, the foremost objective of the SEBI is to provide security to the investors.

(iii) Checking the Insider Trading: Insider trading means the buying and selling of securities by those persons (Directors, Promoters, etc.) who have some secret information about the company and who wish to take advantage of this secret information. This hurts the interests of the general investors. It was very essential to check this tendency. Many steps have been taken to check inside trading through the medium of the SEBI.

(iv) Control over Brokers: It is important to keep an eye on the activities of the brokers and other middlemen in order to control the capital market. To have a control over them, it was necessary to establish the SEBI.
Functions:
The functions of SEBI can be divided into three parts:

I. Protective Functions: Following are the protective functions of SEBI:

(i) To check unfair trade practices (such as, to supply misleading statements to cheat the investors) in connection with security market.

(ii)To check insiders trading in securities. [Insider trading means the buying and selling of securities by those persons (Directors, Promoters, etc.) who have some secret information about the company and who wish to take the advantage of this secret information.)

(iii) To provide education relating to dealing in securities to the investors.

(iv) To promote code of conduct relating to security market.

II. Regulatory Functions: The following are the regulatory functions of the SEBI:

(i) To regulate the business being done in the share market.

(ii)To register brokers, sub-brokers, transfer agents, merchant banks, underwriters etc.

(iii) To register and regulate the credit rating agency.

(iv) To register and regulate the venture capital fund. (v) To carry out audit of share markets.

III. Developmental Functions: The following are the developmental functions of the SEBI:

(i) To impart training to the intermediaries. (Intermediaries include share brokers, Sub-brokers, Share Transfer Agents, Issue Registrars, Merchant Bankers, Portfolio Managers, etc.)

(ii) To encourage self-regulating organisations.

(iii) To carry on research work.

(iv) To publish different kinds of information for the convenience of all the parties operating in the capital market.

The SEBI was set up to achieve the following objectives:

(i) Regulation of Stock Exchanges: The first objective of SEBI is to regulate stock exchanges so that efficient services may be provided to all the parties operating there.

(ii) Protection to the Investors: The capital market is meaningless in the absence of the investors. Therefore, it is important to protect the interests of the investors. The protection of the interests of the investors means protecting them from the wrong information given by the companies in their prospectus, reducing the risk of delivery and payment, etc. Hence, the foremost objective of the SEBI is to provide security to the investors.

(iii) Checking the Insider Trading: Insider trading means the buying and selling of securities by those persons (Directors, Promoters, etc.) who have some secret information about the company and who wish to take advantage of this secret information. This hurts the interests of the general investors. It was very essential to check this tendency. Many steps have been taken to check inside trading through the medium of the SEBI.

(iv) Control over Brokers: It is important to keep an eye on the activities of the brokers and other middlemen in order to control the capital market. To have a control over them, it was necessary to establish the SEBI.

Insider trading means the buying and selling of securities by those persons (Directors, Promoters, etc.) who have some secret information about the company and who wish to take advantage of this secret information. This hurts the interests of the general investors. It was very essential to check this tendency. Many steps have been taken to check inside trading through the medium of the SEBI.

Securities and Exchange Board of India.

 To check unfair trade practices in connection with security market.

To register brokers, sub-brokers, transfer agents, merchant banks, underwriters, etc.

To carry on research work.

To develop and implement the code of conduct relating to security market.

The interest of Mass Investors/Small Investors has been ignored here.

 (i) Bad effect on the health of students.

(ii) Increase in the tendency of using fast food among students.

(iii) Profit to the foreign company.

 (i) To cheat the investors/lenders by providing them false information — fraudulent activities.

(ii) Possibility of overcapitalization.

(iii) Dissatisfaction amongst the employees.

A stock exchange place where stock brokers and traders can buy and sell stocks ,bonds, and other securities. The important functions of a stock exchange are:
(1) Providing Liquidity and Marketability to Existing Securities: Stock exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, an investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increases their marketability and enhances liquidity.

(2) Pricing of Securities: A stock exchange provides platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.

(3) Safety of Transactions: Stock exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and if any member is found violating them, his membership is cancelled.

Financial markets play an important role in the allocation of scarce resources in an economy by performing the following important functions.
1) Mobilisation of savings and making its best use: A financial market helps to transfer savings from savers to investors. It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use.

2) Facilitating Price Discovery: The forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are investors who supply fund and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
3) Providing liquidity to financial assets:  Financial markets facilitate easy sale and purchase of financial assets. Thus they provide liquidity to financial assets, so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.

The major points of distinction between the two markets are as follows: 

Money market refers to institutional arrangements, which deals with short-term securities. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded every day.

Financial market act an intermediary between the saver and user of fund. Hence it performs the allocative function by creating productive investment opportunity.

One of the ‘regulatory functions’ of SEBI is ‘Registration of brokers and sub-brokers and other players in the market’.

Establishing a nationwide trading facility for all types of securities along with ensuring equal access to investors all over the country through an appropriate communication network is one of the objectives of National Stock Exchange of India.

Financial markets play an important role in the allocation of scarce resources in an economy by performing the following four important functions.
1) Mobilisation of savings and making its best use: A financial market helps to transfer savings from savers to investors. It gives savers the choice of different investments and thus helps to channelize surplus funds into the most productive use.
2) Facilitating Price Discovery: The forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are investors who supply fund and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
3. Providing liquidity to financial assets: Financial markets facilitate easy sale and purchase of financial assets. Thus they provide liquidity to financial assets so that they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.
4) Reducing the Cost of Transactions: Financial markets is a place where the buyers and sellers meet to satisfy their financial needs. Financial market provides valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend to try and find each other.

A stock exchange place where stock brokers and traders can buy and sell stocks ,bonds, and other securities. The important functions of a stock exchange are:
(1) Providing Liquidity and Marketability to Existing Securities: Stock exchange is a market place where previously issued securities are traded. Various types of securities are traded here on regular basis. Whenever required, an investor can invest his money through this market into securities and can reconvert this investment into cash. Availability of ready market for sale and purchase of securities increases their marketability and enhances liquidity.

(2) Pricing of Securities: A stock exchange provides a platform to deal in securities. The forces of demand and supply work freely in the stock exchange. In this way, prices of securities are determined.

(3) Safety of Transactions: Stock exchanges are organised markets. They fully protect the interest of investors. Each stock exchange has its own laws and bye-laws. Each member of stock exchange has to follow them and if any member is found violating them, his membership is cancelled.

(4) Contributes to Economic Growth: A stock exchange provides liquidity to securities. This gives the investor a double benefit-first, the benefit of the change in the market price of securities can be taken advantage of and secondly, in case of need for money they can be sold at the existing market price at any time.
These advantages provided by the share market encourage the people to invest their money in securities. In this way, people’s money gets invested in industries and economic development becomes possible.

Money market refers to institutional arrangements, which deals with short-term securities. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded every day. It has no physical location but is an activity conducted over the telephone and through the internet. It enables the raising of short-term funds for meeting the temporary shortages of cash and obligations and the temporary deployment of excess funds for earning returns.

Money market instruments:

1) Call/Notice money: It is an amount borrowed or lent on demand for a very short period. It is short-term finance repayable on demand with a maturity period of one to fifteen days. The money that is lent for one day in this market is known as 'call money' and, if it exceeds one day, is referred to as 'notice money.' No collateral security is required to cover these transactions. Call money is a method by which banks borrow from each other to maintain the cash reserve ratio. The interest rate paid on call money loans is known as the call rate.

2) Certificate of Deposits (CDs): They are unsecured, negotiable short-term instruments issued by banks and financial institutions to raise large amount of money. These are issued in the form of Promissory Notes with maturity ranging from 7 days to one year. The minimum maturity period of a certificate of deposit is between 7 days and one year. They are freely transferable after 45 days of the date of issue.

Stock exchange is an organized market for free purchase and sale of industrial securities. It provides a ready market for the securities.

1. Providing Liquidity and marketability to Existing Securities: The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market.

2. Pricing of Securities: Share prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.

3. Safety of Transaction: The membership of a stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal on the market.

4. Contributes to Economic Growth: A stock exchange is a market in which existing securities are resold or traded. Through this process of disinvestment and reinvestment savings get channelized into their most productive investment avenues. This leads to capital formation and economic growth.

i. The function performed by the market in the given case is Allocative function. By facilitating the sale and purchase of securities, the stock market helps in channelising the savings to most productive investment.

ii. Three other functions performed by the market area: 
a. Provides Liquidity and Marketability: The stock exchange provides a platform where sale and purchase of existing securities can take place. In this way, the stock exchange facilitates the easy conversion of securities to cash as and when required. In addition, it renders liquidity to long-term securities and can be converted to medium-term and short-term securities.
b. Determination of Prices: A stock exchange provides a plat form for the interaction of buyers and sellers. In other words, it helps in the interaction of demand and supply forces in an economy and thereby helps in establishing the price of securities.
c. Reduces cost of transaction: stock trade reduces the cost of transaction in terms of money time and efforts and is an easier approach towards online trade of securities.

Factors affecting the choice of capital structure of a company:
i. Cash flow: Debt should be opted by the company only if it has a strong cash flow position. The cash flow of a company should be enough to pay the expenses and debt and other obligations and further left with surplus also. This is because, at the time of debt, cash is required to pay the principle amount and the interest as well.
ii. Debt-service coverage ratio (DSCR): It depicts the cash payment obligations of a company as against its availability of cash. In other words, it reflects the cash flow position of the company. In case DSCR is high, the company can opt for more debt.
iii. Equity cost: The rate of return expected by the shareholders is directly associated with their investment. Thus cost of equity depicts the financial risk faced by the company. If the financial risk is higher, then the shareholders expect a higher return. This, in turn, implies a rise in the cost of equity. However, if the cost of equity is high, then it would be difficult for the company to opt for more equity.
iv. Condition of stock market: In situations of good stock market conditions, the company can easily opt for equity capital and in case of poor stock market it becomes difficult to opt for equity.

I will convince my friend by telling him the point of difference between capital market and money market.

No, I do not agree with the given statement. Securities of only those companies can be traded in the stock exchange, which have completed its listing requirement.

Money market instruments are more liquid as compare to capital market instruments due to the presence of Discount Finance House of India (DFHI) in the money market. DFHI provides a ready market for money market instruments and that is why, these instruments enjoy higher liquidity.

Securities and Exchange Board of India (SEBI).

1. Dematerialization: It is a process where securities held by the investors in physical form are cancelled and the investors give an electronic entry or number so that she/ he holds it as an electronic balance in an account.
2. Problems with dealing in physical form: (a) Theft; (b) Transfer delays.

Financial markets provide valuable information about securities being traded in the market, which saves time, efforts and money of both buyers and sellers of financial assets in finding each other.

An allocative function of financial market refers to linking the savers and investors by mobilizing funds between them.

Certificate of Deposit.

1. Offer through prospectus.
2. Private Placement.

Right issue refers to a method in which company offers the new shares to its existing shareholders in proportion of shares already held by them.

To regulate stock exchange to promote their orderly functioning.

Financial Market: This market refers to that market where financial securities are exchanged.

Functions of Financial Market:

1. Facilitates Price Discovery: The price of any goods or services is determined by the forces of demand and supply. Like goods and services, the investors also try to discover the price of their securities. The financial market is helpful to the investors in giving them a proper price.
2. Provides Liquidity Financial Assets: This is market where the buyers and the sellers of all the securities are available all the times. This is a reason that it provides liquidity securities. It means that they invest their money, whenever they desire, in securities through the medium of a financial market. They can also convert their investment into money whenever they so desire.

The Securities Exchange Board of India was established in 1992 to protect the interest of investors and to regulate and control the trading of financial securities.

Objectives of SEBI:

1. Regulation of stock exchange: It regulates stock exchanges so that efficient services may be provided to all the parties operating there.
2. Protection to the Investors: SEBI protects the interest of investors from wrong information given by the company and reducing the risk of delivery and payment etc.
3. Checking the Insider Trading: It means the buying and selling of securities by those persons(Directors, Promoters etc) who have some secret information about the company and who wish to take advantages of this secret information. SEBI check insider trading.

Depository: A Depository is an institution which holds the shares of an investor in electronic form. It acts as a bank where investors can open a securities account and deposit the electronic form of securities. At present, there are two depository institutions in India.

1. NSDL: National Securities Depository Limited.
2. CDSL: Central Depository Limited.

D’Mat (Dematerialization) Account refers to that account which is opened by the investors with depository participant to facilitate trading in shares.