Financial Markets Class 12 Notes

A financial market is a market for the creation and exchange of financial assets. Here are the financial markets class 12 notes.

Functions of Financial Market

Financial markets play an important role in the allocation of scarce resources in an economy by performing the following four functions:

Mobilization of Savings and Channeling them into the Most Productive Uses: A financial market facilitates the transfer of savings from savers to investors.
Facilitating Price Discovery: In the financial market, the households are suppliers of funds and business firms represent the demand.
Interactions between them help to establish a price for the financial asset.
Providing Liquidity to Financial Assets: Financial markets facilitate the easy purchase and sale of financial assets.
Reducing the Cost of Transactions: Financial markets help 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.

Money Market

The money market is a market for short-term funds that deals in monetary assets whose period of maturity is up to one year.

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.

The major participants in this market are:

Reserve Bank of India(RBI)
Commercial Banks
Non-Banking Finance Companies
State Governments
Large Corporate Houses
Mutual Funds

Money Market Instruments

1) Treasury Bill

A treasury bill has the following features:

Instrument of short-term borrowing by the government of India for short-term needs
Highly liquid and negligible risk of default
Issued at a lower price than the face value and repaid at par
Maturity- Less than one year
Issuing Authority- Reserve Bank of India
Other name- Zero Coupon Bonds

2) Commercial Paper

A commercial paper has the following features:

Short-term unsecured promissory note
Negotiable and transferable by endorsement
Sold at a discount and redeemed at par
Maturity- 15 days to 1 year
Issuing Authority- Large and Creditworthy companies to raise short-term funds

Bridge Financing: To raise long-term funds in the capital market, the companies have to incur floatation costs that are raised through commercial paper. This is known as bridge financing.

3) Call Money

Call money has the following features:

Short-term finance repayable on demand
Used for interbank transactions to maintain cash reserve ratio
The interest rate is called call money which is highly volatile
Maturity- 1 day to 15 days
Issuing Authority- Commercial Banks

4) Certificate of Deposit

The certificate of deposit has the following features:

Unsecured and negotiable
Short-term instruments in bearer form
Issued to individuals, corporations, and companies during periods of high liquidity
Maturity- 7 days to 1 year
Issuing Authority- Commercial banks and development financial institutions

5) Commercial Bill

A commercial bill has the following features:

Bill of exchange used to finance the working capital requirements of business firms
Short-term, negotiable, and self-liquidating
It can be discounted with the bank with some charges
Maturity- 30 days to 270 days
Issuing Authority- Seller of goods

Financial Management Class 12 Notes

Capital Market

Capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested.

The capital market can be divided into two parts:

a) Primary Market
b) Secondary Market

Primary Market

It is also known as the new issues market. It deals in new securities being issued for the first time.

The essential function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time.

Methods of Floatation

Offer through Prospectus: This involves inviting subscriptions from the public through the issue of a prospectus. A prospectus makes a direct appeal to investors to raise capital through ads in newspapers and magazines.
Offer for Sale: Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers.
Private Placement: Private placement is the allotment of securities by a company to institutional investors and some selected individuals.
Rights Issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company.
e-IPOs: A company proposing to issue capital to the public through an online system of the stock exchange has to agree with the stock exchange which is known as an Initial Public Offer(IPO).

Secondary Market

The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities.

It helps existing investors to disinvest and fresh investors to enter the market. I also provide liquidity and marketability to existing securities.

Functions of a Stock Exchange

Providing Liquidity and Marketability to Existing Securities: The stock market provides the basic function of the continuous market where securities are bought and sold.
Pricing of Securities: Share prices on a stock exchange are determined by the forces of demand and supply.
Safety of Transaction: The membership of a stock exchange is well-regulated and its dealings are well-defined according to the existing legal framework.
Contributes to Economic Growth: A stock market is a market in which existing securities are resold or traded. This leads to capital formation and economic growth.
Spreading of Equity Cult: The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues, better trading practices, and taking effective steps in educating the public about investments.
Providing Scope for Speculation: The stock exchange provides sufficient scope within the provisions of law for speculative activity in a restricted and controlled manner.

Trading and Settlement Procedure

All buying and selling of shares and debentures are done through a computer terminal. A stock exchange has its main computer system with many terminals spread across the country.

Trading of securities is done through brokers who are members of the stock exchange. Here are the steps in the trading and settlement procedure:

Selection of a Broker: If an investor wishes to buy or sell any security, he/she has to first approach a registered broker or sub-broker and enter into an agreement with them.
He/She also has to provide certain details to the broker like PAN number, date of birth, bank A/c details, etc.
Opening a Demat A/c: A Demat account refers to an account that an Indian citizen must open with the depository participant to trade in listed securities in electronic form.
Placing an Order: After opening the Demat Account, the investor can place the order. The order can be placed with the broker either personally or through phone, email, etc.
The investor must place the order very clearly specifying the range of prices at which securities can be bought or sold.
Match the Order: The broker then will go online and connect to the main stock exchange and math the share and best price available.
Executing the Order: When the shares can be bought or sold at the price mentioned, it will be communicated to the broker’s terminal and the order will be executed electronically.
The broker will issue a trade confirmation slip to the investor.
Issue of Contract Note: After the trade has been executed, within 24 hours the broker issues a contract note.
This note contains the details of the number of shares bought or sold, the price, the date and time of the deal, and the brokerage charges.
Delivery of Shares and Making Payment: Now, 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.
This is called pay-in-day.
Settlement: Cash is paid or securities are delivered to the stock exchange by the broker on pay-in-day, which is before the T+2 day as the deal has to be settled and finalized on the T+2 day.
The settlement cycle is on T+2 day on a rolling settlement basis, w.e.f. 1 April 2003.
On the T+2 day, the stock exchange will deliver the shares or make payment to the other broker. This is called pay-out day.
The broker has to make payment to the investor within 24 hours of the payout day. The broker can make delivery of shares in demat form directly to the investor’s demat account.

Consumer Protection Class 12 Notes

Dematerialization

All trading in securities is now done through computer terminals. Since all the systems are computerized, the buying and selling of securities are settled through an electronic book entry form.

The main purpose of this is to eliminate problems like theft, fake transfers, transfer delays, and paperwork associated with share certificates held in physical form.

Dematerialization is a process where securities held by investors in physical form are canceled and the investor is given an electronic entry so that the investor can hold it as an electronic balance in the account.

In other words, dematerialization refers to holding securities in electronic form. For this purpose, the investor has to open a demat account with an organisation called a depository.
SEBI has now made it mandatory to trade in demat form.

Benefits of Dematerialisation

Holding shares in demat form is very convenient as it is just like a bank account.
These demat securities can be even pledged or mortgaged to get loans.
This is mainly done to eliminate problems associated with share certificates or debentures held in physical form like theft, fake transfers, etc.
Various securities of different companies can be held in a single demat account.

Constituents of a Depository System

The depository is the apex organisation or unit in the depository system. It is just like a bank where depositors/investors can deposit and withdraw the money or securities.

In India, there are two depositories, NSDL(National Securities Depositories Limited) and CDSL(Central Depository Services Limited).

Features of a Depository

A depository is an institution that holds securities such as shares, debentures, etc.
The depository interacts with the investors through agents called depository participants (DPs).
DPs can offer services only after obtaining a certificate from SEBI.
Investors have to open a depository account with any DP called a Demat account.
Depository issues receipt of bonus shares in electronic form.
The depository offers a nomination facility for a Demat account.

Depository Participants

The depository participant is an agent of the depository. An investor has to interact only with a DP and not with the depository for all his dealings in shares in electronic form.

As per SEBI guidelines, any financial institution, share brokers, banks, etc. can become DP after registration with SEBI.

DP is the vital intermediary in the depository system and all buying and selling of shares under the depository system take place through DP only.

National Stock Exchange of India(NSE)

The National Stock Exchange is the latest, most modern, and technology-driven exchange. It was incorporated in 1992 and was recognized as a stock exchange in April 1993.

It started operations in 1994, trading in the wholesale debt market segment. The NSE was set up by leading financial institutions, banks, insurance companies, and other financial intermediaries.

It is managed by professionals, who do not directly or indirectly trade on the exchange. The trading rights are with the trading members who offer their services to the investors.

The Board of NSE comprises senior executives from promoter institutions and eminent professionals, without having any representation from trading members.

Bombay Stock Exchange(BSE)

BSE Ltd. was established in 1875 and was Asia’s first stock exchange. It was granted permanent recognition under the Securities Contract (Regulation) Act, of 1956.

It has contributed to the growth of the corporate sector by providing a platform for raising capital.

It is known as BSE Ltd. but was established as the Native Share Stock Brokers Association in 1875. BSE is one such exchange set up as a corporate entity with a broad shareholder base.

Objectives of BSE

To provide an efficient and transparent market for trading in equity, debt instruments, derivatives, and mutual funds.
To provide a trading platform for equities of small and medium enterprises.
To ensure active trading and safeguard market integrity through an electronically-driven exchange.
To conform to international standards.

SEBI(Securities and Exchange Board of India)

SEBI was set up in 1988 to regulate the functions of the securities market. SEBI promotes orderly and healthy development in the stock market.

Initially, SEBI was left as a watchdog to observe the activities but it was found ineffective in regulating and controlling them as SEBI was not able to exercise complete control over the stock market transactions.

As a result, in May 1992, SEBI was granted legal status. SEBI is a corporate body having a separate legal existence and a perpetual succession.

Reasons for Establishment of SEBI

With the growth in the dealing with stock markets, lots of malpractices also started in the stock markets such as price rigging, unofficial premiums on new issues, delays in delivery of shares, violation of rules and regulations of the stock exchange, and listing requirements.

Due to these malpractices, customers started to lose confidence and faith in the stock exchange. Hence the government of India decided to set up an agency to keep a check on such malpractices and protect the interest of investors which is known as SEBI.

Objectives of SEBI

The overall objectives of SEBI are to protect the interest of investors promote the development of the stock exchange and regulate the activities of the stock market.

This may be elaborated as follows:

To regulate stock exchanges and the securities industry to promote their orderly functioning.
To protect the rights and interests of investors, particularly individual investors, and to guide and educate them.
To prevent trading malpractices and achieve a balance between self-regulation of business and its statutory regulations.
To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc.

Functions of SEBI

1) Protective Function

SEBI performs these functions to protect the interest of investors and provide safety for the investment. Under protective functions, various functions are performed by SEBI:

Check on Price Rigging: Price rigging refers to manipulating the prices of securities with the main objective of inflating or depressing the market price of securities. SEBI prohibits such practices because this can defraud and cheat the investors.
It prohibits Insider Trading: An insider is any person connected with the company such as directors, promoters, etc. These insiders have sensitive information which affects the prices of securities.
SEBI prohibits fraudulent and Unfair Trade Practices: SEBI does not allow companies to make misleading statements that are likely to induce the sale or purchase of securities by another person.
SEBI spreads Awareness by Educating Investors: SEBI undertakes steps to educate investors so that they can evaluate the securities of various companies and select the most profitable securities.

2) Development Functions

These functions are performed by SEBI to promote and develop activity in the stock exchange and increase the business activities in the stock exchange.

Under developmental categories, the following functions are performed by SEBI:

SEBI promotes the training of intermediaries of the securities market.
SEBI tries to promote activities of the stock exchange by adopting the flexible approach in the following way:
a) SEBI has permitted internet trading through registered stock brokers.
b) SEBI has made underwriting optional to reduce the cost of the issue.
Even the initial public offer of the primary market is permitted through the stock exchange.

3) Regulatory Functions

These functions are performed to regulate the business in the stock exchange. Under this, the following functions are performed:

SEBI has framed rules and regulations and a code of conduct to regulate intermediaries such as bankers, brokers, and underwriters. etc.
SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, merchant bankers, and all others who are associated with the stock exchange in any manner.
SEBI regulates the takeover of the companies.
SEBI conducts inspections enquiries and audits of the stock exchange.
SEBI registers and regulates the working of mutual funds.