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Financial markets

Financial markets. Introduction. For starting any Business, an entrepreneur needs investments in the form of capital. Depending on the size of the project, the amount of capital varies. Entrepreneur cannot go for investing his own money in the business, so he has to go for borrowing.

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Financial markets

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  1. Financial markets

  2. Introduction For starting any Business, an entrepreneur needs investments in the form of capital. Depending on the size of the project, the amount of capital varies. Entrepreneur cannot go for investing his own money in the business, so he has to go for borrowing. Borrowing has many problem such as paying interest monthly, that too if it is a long term project, he won’t be able to give interest regularly. Banks/Financial Institution may demand a security for their loans in the form of collaterals. The promoter may choose to raise the capital by issuing shares to public making them an offering on future.

  3. Securities market The securities market is a market for equity, debt and derivatives . The classification is as follows.

  4. Structure of securities market

  5. Contd. Except the derivative market , each of the above market has 2 components. the primary market – where new securities are issued. The secondary market – where outstanding securities are sold .

  6. Importance of Securities Market Pooling the capital resources and Developing enterprises Solve the problem of paucity of funds Mobilize the small and scattered savings Augment the availability of investible funds Growth of joint stock business Provide a number of profitable investment opportunities for a small savers.

  7. Capital Market Capital Marketing is defined as “the process of increasing the major part of financial capital required for starting a business through issue of shares to public”. The issue may be Shares, Debentures , Bonds, etc. Capital market is a market for long term debts and equity shares.

  8. Primary equity market • It has been functioning since the nineteenth century • But remained rather dull and inactive till 1991. • In 1992 SEBI was entrusted with the responsibility of regulating the primary market . • Important changes introduced by SEBI like • Free pricing – companies have given freedom in pricing their equity shares and determine the interest rate structure on debt securities. • Disclosure and investor protection guidelines (DIP) – issues of securities have to confirm to fairly elaborate disclosure requirements so that investors can take informed decision. • Efficient delivery mechanism – SEBI has made it mandatory for all the new IPOs to be issued only in demat form . Further the time lapse between the closure of an issue and listing of securities has been compressed . • Three ways a company may raise equity capital in the primary market

  9. Secondary Market Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. Secondary market comprises of Equity market and Debt market. It is the trading avenue in which the already existing securities are traded amongst investors.

  10. Classification of Issues Issues Preferential allotment Right Public Initial Public Offering Further Public Offering Fresh Issue Offer for sale Fresh Issue Offer for sale

  11. Public issue It involves raising of funds directly from the public and get themselves listed on the stock exchange Initial public offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s securities in the Stock Exchanges. Further public offer (FPO): When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called a FPO.

  12. Rights issue Right issue is the method of raising additional finance from existing members by offering securities to them on pro rata bases. The rights offer should be kept open for a period of 60 days and should be announced within one month of the closure of books. BONUS ISSUE:- Companies distribute profits to existing shareholders by way of fully paid bonus share in lieu of dividend. These are issued in the ratio of existing shares held. The shareholders do not have to make any additional payment for these shares

  13. Financial instruments dealt in Secondary market Equity Shares: An equity share is commonly referred to as an ordinary share. It is an form of fractional ownership in which a shareholder, as a fractional owner, undertakes the entrepreneurial risk associated with the business venture. Holders of the equity shares are members of the company and have voting rights.

  14. Contd. • Right shares: • This refers to the issue of new securities to the existing shareholders, at a ratio to those shares already held. • Bonus Shares: • These shares are issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profit earned in the earlier years.

  15. Contd. Preference shares: These shareholder do not have voting rights. Owners of these shares are entitled to a fixed dividend or a dividend calculated at a fixed rate to be paid regularly before any dividend can be paid in respect of equity shares. These shareholders also enjoy priority over the equity shareholders in the payment of surplus.

  16. Debentures: Debentures are bonds issued by a company bearing a fixed rate of interest usually payable half-yearly, on specific dates and the principal amount repayable on a particular date on redemption of the debentures. Debentures are normally secured against the asset of the company in favour of the debenture holder. Bonds: A bond is a negotiable certificate evidencing indebtedness. It is normally unsecured.

  17. The National Stock Exchange • Inaugurated in 1994 • To establish a nation wide trading facility for equities , debt and hybrids • To facilitate equal access to investors across the country • To impart fairness , efficiency and transparency . • It is a ring less, national, computerized exchange . • Two segments- capital market & the wholesale debt market • It is the first exchange in the world to employ the satellite technology . • The trading members in the capital market segment are connected to the central computer in Mumbai through satellite link-up , using VSATs (Very Small Aperture Terminals ) . This enabled NSE nationwide reach .

  18. BSE Established in 1875 One of the oldest organised exchange in the world Switched form open outcry system to screen based system in 1995 Called BOLT ( BSE on line trading ) In Oct. 1996 SEBI permitted to extend its network outside Mumbai . In 2002, subsidiary companies of 13 regional exchanges became members of BSE Members of regional exchanges now serve as subbrokers of BSE

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