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S.Y.B.

COM
MONEY MARKETS &CAPITAL MARKETS
Money is usually defined as anything which is generally acceptable as payment for goods and services and for discharge of debts. Capital is that part of wealth which is used process of business & economy. A market is a body of persons in such commercial relations that each can easily acquaint himself with the rate at which certain kinds of exchange s of goods & services are from time to time made by the others.

Financial System
Financial system includes all those activities dealing in finance into a system Promotes the well being and standard of living of the people of a country Mobilize the saving
Promotes investment

Financial Market Defined as the market in which financial assets are created or transferred. These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Flow of funds (savings)

Seekers of funds (Mainly business firms Flow of financial services and government)
Incomes , and financial claims

Suppliers of funds (Mainly households)

Indian Financial System


Non- Organized

Organized Regulators Financial Institutions Financial Markets Financial services

Money lenders
Local bankers Traders

Landlords
Pawn brokers Chit Funds

Evolution of Financial System


Barter

Money Lender
Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Societies Banks

Joint-Stock Banks

Consolidation Commercial Banks Nationalization

Investment Banks Development Financial Institutions Investment/Insurance Companies


Stock Exchanges Market Operations

Specialized Financial Institutions Merchant Banking


Universal Banking

Interrelation--Financial system & Economy


Financial System
Savers Lenders Households Foreign Sectors

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy

Organized Indian Financial System

Regulators

Financial Instruments

Financial Markets

Financial Intermediaries

Forex Market

Capital Market

Money Market

Credit Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

Classification Money market (Short term instrument) Capital markets (Long term instrument)

The most important distinction between the two: The difference in the period of maturity.

Main Function
To channelize savings into short term productive investments like working capital .

Instruments in Money Market


Call money market Treasury bills market Markets for commercial paper Certificate of deposits Bills of Exchange Money market mutual funds Promissory Note

Purpose of the money market


Banks borrow in the money market to:
Fill the gaps or temporary mismatch of funds To meet the CRR and SLR mandatory requirements as stipulated by the central bank To meet sudden demand for funds arising out of large outflows (like advance tax payments)

Call money market serves the role of equilibrating the short-term liquidity position of the banks

Bill Market
Treasury Bill market- Also called the T-Bill market These bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of India A promise to pay the stated amount after expiry of the stated period from the date of issue They are issued at discount to the face value and at the end of maturity the face value is paid The rate of discount and the corresponding issue price are determined at each auction RBI auctions 91-day T-Bills on a weekly basis, 182day T-Bills and 364-day T-Bills on a fortnightly basis on behalf of the central government

Unsecured Promissory note. Issued by well known companies with strong and high credit rating.

Sold directly by the issuers to investors or through agents like merchant banks and security houses.
Flexible Maturity Low interest rates with compared to banks.

Imparts a degree of financial stability to the system.

Defined as short term deposit by way of usance promissory notes. Greater flexibility to investors in the deployment of surplus funds.

Permitted by the RBI to banks


Maturity of not less than 3 months and upto 1 year. Transferable in nature Free negotiability and limited flexibility

Referred as note payable in accounting

It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee).
The obligation may arise from the repayment of a loan or from another form of debt.

For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Invest primarily in money market instruments of very high quality.

RBI and public financial institution can set it either directly or through its existing subsidiaries.

MMMF
Open Ended Close Ended

Indian Capital Market

Market

Instruments

Intermediaries Regulator
SEBI

Primary

Secondary

Brokers Investment Bankers Stock Exchanges Underwriters Hybrid Debt

Equity

Players

CRA

Corporate Intermediaries

Individual

Banks/FI

FDI /FII

Provided resources needed by medium and large scale industries. Purpose for these resources
Expansion Capacity Expansion Investments Mergers and Acquisitions

Deals in long term instruments and sources of funds

Main Activity
Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.

Provides opportunities to various class of individuals and entities.

Capital Market Instruments

Equity

Hybrid

Debt

Equity Shares

Preference Shares

ADR / GDR

Debentures Zero coupon bonds

Deep Discount Bonds

Primary Markets
When companies need financial resources for its expansion, they borrow money from investors through issue of securities. Securities issued a)Preference Shares b)Equity Shares c)Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company. People who apply for these securities are: a)High networth individual b)Retail investors c)Employees d)Financial Institutions e)Mutual Fund Houses f)Banks One time activity by the company.

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares are tradable through a private broker or a brokerage house. Securities that are traded are traded by the retail investors.

Helps in mobilising the funds for the investors in the short run.

Management of issues in primary market


Public issue Right issue Issue of bonus shares Private placements

Public issue
Must pass a resolution in the meeting of the BOD Merchant banker at least 21 days prior to the filing of prospectus with the registrar of the co. 1) pre issue obligation 2) post issue obligation

Issue of right shares


When an existing co makes further issue of share, it is compulsory for it to offer them to existing sh.holders in proportion to their present holding.

Procedure for issuing right shares


Decision taken by BOD The terms of issue also specified Necessary information is field with registrar within 30 days of the passing of the resolution Secretary prepares a list of members who are entitled to the shares and no. of shares to be offered Secretary will prepare a list of members who have consented to subscribe for the shares offered to them All shares disposed off ,the sec. will prepare share certificate Letter of allotment is filed in the prospectus Necessary alteration are make in MOU

Issue of bonus shares


It is prudent policy on the part of the co. not to distribute its entire profit as dividend to sh.hol. but to transfer a portion of such profit to reserves to meet unknown contingencies and to strengthen the financial position of the co.

Sources of bonus share


Credit balance of p&l a/c General reserve Balance of debenture redemption fund or sinking fund Capital redemption reserve a/c Share premium a/c Profit on acquisition of buss. Profit on sale of fixed assets

Procedure for issuing bonus shares


A decision taken by the BOD Secretory prepare a list of shareholders Letter of allotment are dispatched to sh.hol.similar like issue of further share, except application are not invited Sh.hol. Are advised to get them in exchange of letters of allotment. A retuen of allotment is field with redistrar Fractional bonus shares.

Private placements
Funds are raised in the primary market by selling the securities to the investors either singly or institutionally. Simplicity Less issue expense Flexibility Prompt collection of funds Response is private matter Secrecy Institutional investors like mutual funds, LIC,GIC, DEVELOPMENT BANKS etc.

Stock exchange

Definition
Stock exchange is an association or body of individuals, whether incorporate or not established for the purpose of assisting, regulating, and controlling buss. In buying ,selling, and dealing in securities. Securities contract act ,1956 A stock exchange is an associaton of persons engaged in buying & selling of stocks, bonds and shares for the public on comission and are guided by certain rules & usages. Shri k.l. garg

Characteristic of Stock Exchange


Voluntary association Provides facilities for dealing Strict standard of membership Management by governing board Listing of shares Dealings through authorized broker

Function of stock exchange


Direct flow of savings Provides continuous market Easy credit facilities Facilities sale of new securities Leads safety of dealings Proper evaluation of securities Facilities speculation Storehouse of buss. Information

BENEFITS OF STOCK EXCHANGES TO INVESTORS TO COMPANIES TO COMMUNITY

Imparts liquidity to securities Knowledge of market prices

Good response to new issues Enhances prestige of the co

Guidance to investors Investment of communitys savings in profitable channels Helps capital formation Encouraged to well managed co. Useful to govt. in collecting huge finances

Getting loans on Higher prices of security of listed co. listed security Quotations have educative value Safety of dealings No threat to control Less fluctuation in prices Wide market

Investments of sound co.

Members of stock exchange jobber & his characteristics Dealer, specialists, stability in the market, dealing with brokers, jobbers profit Equalizing quantity, speculation, two way quotes, matching demand & supply, co sponsorship

Brokers & their characteristics

Agent Generalist Conduit between jobbers & public Income in the form of commission

Listing of shares
IPO Size of public offer: not less than 25% of issued capital & post issue paid up capital is not less than Rs. 10 cr. Filing application : MA, AA, prospectus , directors report , specimen copies of share certificates, & debenture certificates Wide distribution of shares: 5 for each Rs. 1 lakh cap Dividend & bonus in the past 10 years Brief history of the co. Management pattern

Payment of listing fees Signing listing agreement Screening the application Listing the shares

Types of dealings

Dealings in cash market Dealings in future & option market Arbitrage Margin trading Short sale

Methods of trading & settlement transaction


Selecting a broker Refrence for customer Placing an order Execution of order Informing the customer Settlement

Taking delivery Reversing the transaction By carry over

Clearing House

Each futures exchange has its own clearing house. All members of an exchange are required to clear their trades through the clearing house at the end of each trading session and to deposit with the clearing house a sum of money (based on clearinghouse margin requirements) sufficient to cover the member's debit balance.

For example, if a member broker reports to the clearing house at the end of the day total purchase of 100,000 bushels of May wheat and total sales of 50,000 bushels of May wheat, he would be net long 50,000 bushels of May wheat. Assuming that this is the broker's only position in futures and that the clearing house margin is six cents per bushel, this would mean the broker would be required to have $3,000 on deposit with the clearing house. Because all members are required to clear their trades through the clearing house and must maintain sufficient funds to cover their debit balances, the clearing house is responsible to all members for the fulfillment of the contracts.

Settlement cycle is the period for which equities are traded in Exchange. For Indian stock exchange NSE, the cycle starts on Wednesday and ends on the following Tuesday, and for BSE the cycle starts on Monday and ends on Friday. At the end of this settlement cycle period, the obligations of each broker are calculated and the brokers then settle their respective obligations according to the guidelines, laws and regulations institutionalized by the Clearing agency

Pay-In is a process where by a stock broker and Custodian (in case of Institutional deals) brings in money and/or securities to the Clearing House. This forms the first phase of the settlement activity Pay-Out is a process where Clearing House pays money or delivers securities to the brokers and Custodians. This is the second phase of the settlement activity

All the above information is mostly in relation to the Indian Stock market. Sometimes in different countries processes may have some deviation from it, but the basic fundamentals behind the whole process remains same. In India, the Payin of securities and funds happens on T+ 2 by 11 AM, and Pay-out of securities and funds happen on T+2 by 3 PM.

What is margin trading? Suppose if you have Rs 25000 in your trading account and if your broker provides 4 times margin then you can do day trading till Rs one lakh. Note - Margin trading also depends on share category on which trading is done. For example - A category shares get full margin while B category shares get less margin and this will go on decreasing as you move down. Advantages of margin amount Major advantage of margin amount is if you have less money then also you can buy more shares. Some experienced traders make use of margin amount to do multiple trades taking very small profits.

Disadvantage of margin amount Time restrictions - If you use margin amount then you have to square off your trades before 3:30 pm whether your trade is in profit or loss it doesnt matter. We have also the information that even some trading terminals square off your trades automatically at 3:00 pm if you use the margin amount. So if you use the margin amount then you have the time restriction irrespective of whether your trade is in profit or loss you have to square off your trade because the margin amount is not your money its brokers money which is given to you only for a single day for trading. If you forget to square off your trade then you have to pay heavy plenty or some brokers charge interest rates on the margin amount.

So the bottom line is if you use the margin amount for day trading then you have to square off your trades irrespective whether you are making profit or loss.