Revision Notes for Class 12 Business Studies Chapter 10 Financial Market
Here we are providing Revision Notes for Class 12 Business Studies Chapter 10 Financial Market. These are the important points related to the chapter. Students should remember these points.
The existence of well developed financial markets is indispensable for the successful running out business enterprises, which in turn leads to growth of an economy.
CONCEPT OF FINANCIAL MARKET
A financial market is a market for the creation and exchange of financial assets. Financial market serves as an intermediary between the surplus sector (households which have savings) and deficit sector (business firms which needs funds).
FUNCTIONS OF FINANCIAL MARKET
(a) Mobilisation of savings and channelising them into the most productive uses: Financial markets act as an intermediary and facilitate the transfer of funds from the surplus sector (savings of the household) to the deficit sector (business firms).
(b) Facilitating Price Discovery: The prices of the financial assets are determined by the forces of demand and supply i.e. through the interaction between the surplus sector and deficit sector.
(c) Providing Liquidity to Financial Assets: The existence of financial markets provides liquidity to the financial assets by providing ready markets, wherein the securities can be easily traded.
(d) Reducing the Cost of Transactions: It helps in reducing the cost of transactions by saving time, effort and money that would have been spent by the buyers and sellers in locating each other.
CLASSIFICATION OF FINANCIAL MARKET
The financial markets can be classified into capital market and money market on the basis of the maturity of financial instruments traded in them.
The money market constitutes the market for short term funds which deals in monetary assets whose period of maturity is up to one year.
MONEY MARKET INSTRUMENTS
TThe various instruments of money market are described below:
(a) Treasury Bills: Treasury bills are short term money market instrument which are issued by Reserve Bank of India on behalf of the Central Government. They represent the borrowing by the Government of India.
(b) Commercial Papers: Commercial Papers are the short term money market instrument issued by large and credit worthy companies as an alternative to bank borrowing.
(c) Call Money: Call money is short term loan raised by one bank from another and is repayable on demand
(d) Certificate of Deposit: Certificate of deposit is a short term money market instrument issued by commercial banks and development financial institutions during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high.
(e) Commercial Bill: A Commercial bill, is a bill of exchange used as a short term money market instrument used to finance the working capital requirements of business firms.
The term capital market refers to facilities and institutional arrangements through which longterm funds, both debt and equity are raised and invested.
The primary market deals with new securities being issued for the first time. Therefore, it is also referred to as the new issues market.
Methods of Floatation in Primary Market
A company may float new issues in the primary market through various methods as described below:
(a) Offer through Prospectus: Under this method, a company invites subscriptions from the general public for its securities like, equity shares, debentures, bonds etc. through an issue of prospectus.
(b) Offer for Sale: Under this method, the securities are not issued directly to the public but are offered for sale through intermediaries, such as issuing houses or stock brokers.
(c) Private Placement: Under this method, a company issues securities to institutional investors and some selected individuals.
(d) Rights Issue: Under this method, a company provides a privilege exclusively to the existing shareholders, to subscribe to a new issue of shares according to the terms and conditions of the company.
(e) e-IPOs: Under this method, a company desirous of issuing securities to general public through the online system is allowed to do so with a prior agreement with the stock exchange. It is called an Initial Public Offer (IPO).
The secondary market is commonly referred to as the stock market or stock exchange. It is a market for the trading of the old/existing securities of the companies. It leads to capital formation indirectly by providing liquidity and marketability to the existing securities.
MEANING OF STOCK EXCHANGE
According to Securities Contracts (Regulation) Act 1956, stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities.
FUNCTIONS OF A STOCK EXCHANGE
Some of the important functions of a stock exchange are described below:
(a) Providing Liquidity and Marketability to Existing Securities: By providing a ready market for financial assets, it lends both liquidity and easy marketability to the existing securities in the secondary market.
(b) Pricing of Securities: The prices of securities in the secondary market are determined by the market forces of demand and supply.
(c) Safety of Transaction: The working of a stock exchange is well regulated and it offers a transparent, fair and safe platform for trading in securities to the investors.
(d) Contributes to Economic Growth: The efficient functioning of the stock exchanges promotes the process of capital formation indirectly through the process of continuous disinvestment and reinvestment of savings and leads to economic growth of a nation.
(e) Spreading of Equity Cult: The existence of a well regulated and efficient system for trading in securities motivates people to take an active part in the process of exchange.
(f) Providing Scope for Speculation: The stock exchange provides the framework for well regulated speculative activities which are carried out within the provisions of law.
TRADING AND SETTLEMENT PROCEDURE
The electronic system of trading in securities have replaced the age old method of open outcry system, where in the securities were traded on the floor of the stock exchange.
STEPS IN THE TRADING AND SETTLEMENT PROCEDURE
The steps involved in buying and selling of securities online as described below:
(a) Opening a trading account and Demat account: In order to start the trading in securities the investor has to first open a trading account in his name. The investor has to then
approach Depository Participant for opening a ‘demat’ account or ‘beneficial owner’ (BO) account. He also needs to open a bank account through which cash transactions in the securities market will be carried out.
(b) Placing an order: Now, the investor may place an order with a broken for purchasing or selling the securities. He has to give clear instructions to the broker about the number of the shares and the price at which he is willing to buy or sell them. The broker then will access the portal of the main stock exchange on-line and initiate steps to strike a deal by matching the share and best price available.
(c) Execution of order: When the details of the transactions match online and the shares can be bought or sold at the price mentioned, it will be communicated to the broker’s terminal. All receiving the consent of the broker for the same, the order will be executed electronically. Within 24 hours of the execution of the order the broker issues a contract note to the investor.
(d) Settlement of order: On receiving the contract note, the investor has to deliver the shares sold or pay cash for the shares bought. This should be done immediately after receiving the contract note or before the day when the broker shall make payment or delivery of shares to the exchange. This is known as the pay-in day. On the T+2 day, in case of sale the exchange will deliver the shares or make payment to the other broker in case of purchase. This is called the pay-out day. On receiving the payment from the exchange the broker then has to make payment to the investor within 24 hours of the payout day. Thereafter, the broken can make deliver the share electronically directly to the investor’s demat account. In order to facilitate this investor has to provide details of his demat account and instruct his depository participant to accept the delivery of securities directly in his beneficial owner account.
DEMATERIALISATION AND DEPOSITORIES
The process of holding securities in electronic form is known as dematerialisation.
Depository: A depository acts as a custodian of the securities in electronic form on behalf of the investors. In India there are two depositories:
• National Securities Depository Limited (NSDL)
• Central Depository Services Limited (CDSL)
Depository Participant (DP): The depository participant (DP) serves as an intermediary between the investor and the Depository (NSDL or CSDL) who is authorised to maintain the accounts of dematerialised shares. Financial institutions, banks, clearing corporations, stock brokers and non-banking finance corporations are permitted to become depository participants.
THE SECURITIES AND EXCHANGE BOARD OF INDIA
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It was established in the year 1988 by the Government of India. It was to function under the overall administrative control of Ministry of Finance of the Government of India. It was given statutory powers on 30th January 1992 through an ordinance. The ordinance was later on replaced by an Act of Parliament known as the Securities and Exchange Board of India Act, 1992.
PURPOSE AND ROLE OF SEBI
The Securities and Exchange Board of India was primarily set up to create an environment conducive to effective and efficient trading in securities. Besides, promoting competition and encouraging innovation in the stock exchange. This environment comprises of rules and regulations, institutions and their interrelationships, instruments, practices, infrastructure and policy framework.
OBJECTIVES OF SEBI
The prime objective of setting up SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market. These are stated as follows:
(a) To protect the rights and interest of investors, and to guide and educate them.
(ib) 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.
(c) To prevent trading malpractices and create a balance between self regulation by the securities industry and its statutory regulation.
(d) To regulate and define a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc., with an objective to make them competitive and professional.
FUNCTIONS OF SEBI
The various functions performed by the securities and exchange Board of India can be broadly classified into groups namely; protective, regulatory and developmental functions.
Protective Functions of SEBI
(i) SEBI prohibits fraudulent and unfair trade practices in the securities market (it) Promotion of fair practices and code of conduct in securities market (iii) Undertaking steps for investor protection
(iv) Controlling insider trading and imposing penalties for such malpractices.
Developmental Functions of SEBI
(i) Ensuring training of intermediaries of securities market
(ii) Conducting research and publishing information useful to all market participants (iii) Facilitating flexibility in the working of capital markets.
Regulatory Functions of SEBI
(i) Registration and regulation of brokers, sub-brokers and other players in the financial market.
(ii) Registration of collective investment schemes and Mutual Funds.
(iii) Conducting enquiries and audits of stock exchanges & intermediaries.
(iv) Regulation portfolio exchanges, underwriters, merchant bankers and the dealings in the stock exchanges.
(v) Regulation of take over bids by the companies.