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Contents
Various types of financial markets What is a Capital Market? Nature of Capital Market Capital Market Efficiency Types of Capital Markets Primary Market Methods of Raising Capital in Primary Market Features of Primary Market Secondary Market Features of Secondary Market Participants in the Secondary Market Products dealt in Secondary Market Difference between primary and secondary market SEBI and its Features 2
What are the various types of financial markets? The Financial Markets can broadly be divided into:
MONEY MARKET
CAPITAL MARKET
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Capital Market ď‚ž
The market where investment instruments like bonds, equities and mortgages are traded is known as the Capital Market.
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The primal role of this market is to make investment from investors who have surplus funds to the ones who are running a deficit. 4
Significance of Capital Market Link between savers and investors Stability in security prices Speed up economic growth and development Helps in capital formation Helps in creating liquidity
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Capital Market Efficiency The degree to which the present asset price accurately reflects current information in the market place. Forms: Weak Semi strong Strong 6
Types of Capital Markets :
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PRIMARY MARKET :
A market where the issuers access the prospective investors directly for funds required by them either for expansion or for meeting the working capital needs. This process is called disintermediation where the funds flow directly from investors to issuers. The primary market is also called new issue market.
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Features of Primary Market:
This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issue new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as ‘going public’. 9
Methods of raising capital in the Primary Market: Public issue Private placement Euro issues Government securities Offer for sale Right issue Electronic initial public offering
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SECONDARY MARKET : A market where securities are traded after being initially offered to the public in the primary market and/or listed in the stock exchange. Majority of the trading is done in the secondary market. This market comprises of Equity market and Debt Market. Secondary market provides liquidity to the securities on the exchange(s) and this activity commences subsequent to the original issue. 11
Features of Secondary Markets Help in determining fair prices based on demand and supply forces and all available information Provides easy marketability and liquidity for investors Facilitation in capital allocations in primary market through price signalling Enabling investors to adjust portfolios of securities
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Participants in the Secondary Market Stock Exchange Clearing Corporation Depositories/ DP Trading Member (Stock Broker)/ Clearing Member Registrar to an Issue and Share Transfer Agent
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What are the products dealt in Secondary Markets ?
Equity shares
Debentures
Government securities
Bonds 14
Difference between Primary and Secondary Market In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/preissued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is a part of an auction market. 15
Securities and Exchange Board of India (SEBI) SEBI is the regulator of securities market in India. It was established on 12 April 1988.
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SEBI is required to regulate and promote the securities market by: ď‚ž Providing fair dealings in the issues of securities and ensuring a market place where funds can be raised at a relatively low cost. ď‚ž Providing a degree of protection to the investors and safeguard their rights and interests so that there is a steady flow of savings into the market. ď‚ž Regulating and developing a code of conduct and fair prices by intermediaries in the capital market like brokers and merchant banks with a view to make them competitive and professional. 17
Role of SEBI in Indian Capital Market
Power to make rules for controlling stock exchange : SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock market.
To provide license to dealers and brokers : SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, then SEBI can also control to that product and its dealers.
To Stop fraud in Capital Market : SEBI has many powers for stopping fraud in capital market. > It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. > It can impose the penalties on capital market intermediaries if they involve in insider trading.
To Control the Merge, Acquisition and Takeover the companies : SEBI sees whether this merge or acquisition is for development of business or to harm capital market.
To audit the performance of stock market : SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges. 18
To make new rules on carry - forward transactions : > Share trading transactions carry forward can not exceed 25% of broker's total transactions. > 90 day limit for carry forward.
To create relationship with ICAI : SEBI creates good relationship with ICAI for bringing more transparency in the auditing work.
Introduction of derivative contracts on Volatility Index : For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index
To Require report of Portfolio Management Activities : SEBI has also power to require report of portfolio management to check the capital market performance.
To educate the investors : Time to time, SEBI arranges scheduled workshops to educate the investors. 19
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