Financial Markets Class 12 Notes

A financial market is a market where the financial assets, the securities, are traded, and it is the market that connects those who have the money and those who need it.

• A financial market is a market of the financial assets and not of the goods, so the price that is paid is the price of a claim and not of a commodity, and this is the first thing to say about it.
• It is a market of the securities, and the securities are of three kinds, the shares, the debentures and the public issues, and each gives a different claim on the issuer.
• The financial market is of two kinds, the money market for the short-term funds and the capital market for the long-term funds, and the two are separated by the period of one year.
• The market may be organised or unorganised, and the stock exchange is the organised form of the capital market and the call money market is the organised form of the money market, while the rest of the money market is unorganised.
• The financial market is also of two kinds by the purpose, the primary market where the securities are issued for the first time and the secondary market where the securities that were already issued are traded, and the two are treated in detail later.

The money market is the market of the short-term funds, and the chapter defines it by the period and then lists the instruments of it.

• The money market is the market of the short-term funds, that is, the funds lent for a period of not more than one year, and it is the market that supplies the working capital to the enterprise.
• The instruments of the money market are the commercial paper, which is an unsecured and an openly issued promissory note of a large corporate that is issued for a short period, the treasury bills, which are the short-term securities of the government, the certificates of deposit, which is the instrument of a bank that is sold to the public and can be cashed at the bank at the notice, and the bankers' acceptances and the commercial bills.
• The commercial bills are of two kinds, the demand bill and the usance bill, and the demand bill is payable on demand while the usance bill is payable after a fixed period, and the commercial bill is used for a short period of not more than one year.
• The money market is mostly unorganised, and the only organised part of it is the call money market, in which the commercial banks lend to each other for a very short period, usually overnight, and this is done to meet the temporary requirement of the cash.
• The call money market is the market of the loans of the banks to one another, and the rate at which the loans are made is the call rate, and it is a temporary arrangement and the loan is returned on the demand.

The capital market is the market of the long-term funds, and it is divided into the market for the corporate securities and the market for the government securities.

• The capital market is the market of the long-term funds, that is, the funds lent for a period of more than one year, and the corporate securities are the shares, the debentures and the public issues.
• The market for the corporate securities is the market where the securities of the companies are traded, and it is organised through the stock exchanges, and the stock exchange is an association of the members who buy and sell the securities for one another.
• The market for the government securities is the market where the securities of the central government and of the state government are traded, and this is called the gilt-edged market because the securities of the government are the most secure, and the securities of the government are the treasury bonds and the treasury notes.
• A stock exchange is an organised market where the securities of the joint stock companies and of other securities are bought and sold, and it is a place where the members trade on behalf of the clients, and the trading is done in the prescribed form and under the rules of the exchange.
• The stock exchanges are the places where the securities are traded and they also perform the function of the clearing and the settlement and they act as the clearing house, and they fix the prices by the demand and the supply, and they also provide the index of the prices.

The three securities of the capital market each give a different claim, and the comparison between the shares and the debentures is one of the standard questions of the chapter.

• A share is a unit of ownership, so it is an evidence of the ownership of a part of the company, and the shareholder has a right on the capital, a right on the income in the form of the dividend, and a right to vote at the meeting, and he carries the risk of the company.
• A debenture is a loan instrument, so it is evidence of a borrowing by the company, and it is a fixed charge on the assets of the company, and the debenture holder has a fixed rate of interest and the interest is paid whether or not the company is making a profit, and the debenture holder does not have a voting right in the ordinary way.
• A public issue is when the company offers its securities to the public for the first time, so it is the issue of the new securities, and the issue is made through the prospectus and it may be at par, at a discount or at a premium.
• The share is the equity and the debenture is the debt, so the return on the share is the dividend and it is not assured, and the return on the debenture is the interest and it is fixed, and the share carries a higher risk and a higher expected return while the debenture carries a lower risk and a lower return.
• The other terms that the chapter defines are the public issue, the bonus issue, the rights issue, the private placement, the bonus, the sweat equity, the market price and the face value, and the market price is the price at which the security is traded while the face value is the value printed on it.

The primary market is the market in which the securities are issued for the first time and the money flows from the investor to the company, and in the secondary market the already issued securities are traded and the money flows between the investors.

• The primary market is the market where the securities are issued for the first time, and it is where the company receives the money, and it is also called the new issue market, and it is here that the money of the investors reaches the enterprise.
• The methods of the primary market are the public issue, the private placement, the rights issue and the bonus issue, and the public issue is the one in which the securities are offered to the public at large, and the private placement is the one in which the securities are placed with a selected set of investors.
• The secondary market is the market where the securities that have already been issued are traded, and the money flows from one investor to another and not to the company, and the company does not receive anything from it.
• The necessity of the secondary market is that the investors must be able to get out of the investment, and the liquidity that the secondary market gives is what makes the people willing to buy in the primary market at all, and the trading is done through the stock exchanges.
• The difference between the two is the issuer, the primary is the company and the secondary is the exchange, the money, the primary gives it to the company while the secondary moves it between the investors, and the securities, the primary issues the new ones while the secondary trades the old ones.

The chapter closes with the structure of the market, the role of the SEBI, the depository and the reform of the exchanges, and the three together explain how the market is now regulated and how it is settled.

• The SEBI is the apex body of the securities market, and it was established by an Act of the Parliament in 1992, and it is the regulator that protects the investors and it regulates the stock exchanges, it frames the rules, it registers the intermediaries and it prohibits the insider trading and the fraudulent practices.
• The functions of the SEBI are the regulation of the stock exchanges and of the other financial instruments, the registration of the stock brokers, the sub-brokers and the other intermediaries, the prevention of the fraud and the insider trading, the redress of the investor grievances, and the promotion of the investor education.
• The depository system has replaced the physical share certificates with the electronic ones, and the depository holds the securities in an electronic form and it transfers them without the paper, and the benefit is that the trading is quicker, the cost of the transaction is lower and the risk of the loss, the theft and the forgery is almost removed.
• The demutualisation of the stock exchanges means that the ownership of the exchange, the membership of the broker and the right to trade have been separated, and the exchange can no longer be owned by the brokers who trade on it, and this was done so that the interests of the exchange and of the broker would not conflict.
• The trading in the demutualised exchange is done on the screen and there is no physical trading on the floor of the exchange, and the transactions are settled on the T+1 basis, which means that the payment and the delivery take place on the first day after the trade.