Financial Markets

Financial Markets: • Financial markets are platforms (physical or virtual) where buyers and sellers of financial instruments (securities, currencies, commodities) come together to trade. • They facilitate the flow of funds from those who have surplus (savers/investors) to those who need funds (borrowers/businesses/government). • They provide liquidity to investors (the ability to sell securities quickly), enable price discovery, and promote efficient allocation of capital in the economy. Money Market: • The money market deals in short-term financial instruments — instruments with a maturity of one year or less. • Participants: Commercial banks, the RBI, financial institutions, government, large corporations. • Purpose: Provides short-term liquidity and meets short-term borrowing needs. • Instruments: Treasury Bills (T-Bills), Commercial Paper (CP), Certificates of Deposit (CDs), Call Money, Commercial Bills (Trade Bills). • Key features: High liquidity, low risk, low return, instruments can be readily converted to cash. • Treasury Bills: Short-term government borrowing instruments (91 days, 182 days, 364 days) — considered risk-free; issued at a discount and redeemed at face value. • Commercial Paper: Unsecured promissory notes issued by large, creditworthy companies to raise short-term funds. Capital Market: • The capital market deals in long-term financial instruments — instruments with maturity of more than one year (or no fixed maturity, like equity shares). • Participants: Companies, government, insurance companies, mutual funds, banks, FIIs, retail investors. • Purpose: Provides long-term capital for business investment and infrastructure. • Instruments: Equity shares, preference shares, debentures, government bonds, corporate bonds. • Key features: Higher risk (especially equity), higher potential return, lower liquidity than money market. • Sub-divisions: Primary market (new issues) and Secondary market (stock exchanges). Key differences: • Time horizon: Money market — short-term (≤1 year); Capital market — long-term (>1 year). • Risk: Money market — low risk; Capital market — higher risk. • Return: Money market — lower; Capital market — higher (especially equity). • Instruments: Money market — T-Bills, CP, CD; Capital market — shares, debentures, bonds.

Stock Exchange: • A stock exchange (also called a securities exchange or share market) is an organised marketplace where buyers and sellers come together to trade in listed securities (shares, debentures, bonds, mutual funds). • In India, the two major stock exchanges are: BSE (Bombay Stock Exchange, established 1875 — Asia's oldest) and NSE (National Stock Exchange, established 1992). • Both operate electronic trading platforms — physical trading floors are largely replaced by screen-based trading. Functions of Stock Exchange: 1. Providing Liquidity and Marketability: • Investors can easily buy and sell securities at any time during trading hours — converting investments to cash quickly. This liquidity makes investment in securities attractive. 2. Pricing of Securities (Price Discovery): • Stock prices are continuously determined by supply and demand of millions of investors — reflecting all publicly available information about a company's prospects. 3. Safety of Transactions: • Stock exchanges are regulated by SEBI; listing requirements and trading rules protect investors from fraud and manipulation. All transactions are recorded and transparent. 4. Contributes to Economic Growth: • By channelling savings into productive investment in companies, stock exchanges facilitate capital formation and economic growth. 5. Spreading Equity Cult: • Makes equity investment accessible to small investors — democratising wealth creation. 6. Provides Scope for Speculation (within limits): • Regulated speculation provides liquidity and continuous price discovery. SEBI (Securities and Exchange Board of India): • SEBI was established by the SEBI Act, 1992 as the statutory regulator of the securities market in India — equivalent to the US SEC (Securities and Exchange Commission). • Headquarters: Mumbai. Objectives of SEBI: 1. Protect the interests of investors: Prevent fraud, insider trading, market manipulation, and unfair practices. 2. Promote the development of the securities market: Create conditions for a fair, efficient, and transparent market. 3. Regulate the securities market: Make rules for all participants — companies, brokers, mutual funds, foreign institutional investors. Functions: Registration of market intermediaries; regulation of stock exchanges and mutual funds; prohibition of insider trading; investor education; investigation of market abuses.

Primary Market: • The primary market (also called the New Issue Market) is where new securities are issued for the first time — companies raise fresh capital directly from investors by selling new shares or debentures. • The company receives the proceeds of the sale — the capital raised goes directly to the issuing company. Methods of Raising Funds in the Primary Market: 1. Initial Public Offering (IPO): • When a company offers its shares to the public for the first time. • The company exits the unlisted category and becomes a publicly listed company on a stock exchange. • Example: Zomato's IPO in 2021 raised ₹9,375 crore. 2. Follow-on Public Offer (FPO): • When an already-listed company issues additional new shares to the public. • Used to raise additional capital after the initial listing. 3. Rights Issue: • Existing shareholders are offered new shares in proportion to their current holding, at a discount to the market price. • Protects existing shareholders from dilution — they have the 'right' to maintain their proportionate ownership. 4. Private Placement: • Securities are offered to a select group of investors (institutional investors, HNIs) rather than the general public. • Faster and cheaper than a public issue — suitable for urgent capital needs. 5. Bonus Issue: • Free shares given to existing shareholders from the company's retained profits — not a fundraising method but increases the number of shares in circulation. Primary vs. Secondary Market: 1. Purpose: Primary — raises fresh capital for the company; Secondary — provides liquidity to existing investors (no new capital to the company). 2. Participants: Primary — company + new investors; Secondary — buyers and sellers of existing securities among themselves. 3. Price: Primary — price determined by the company (in consultation with investment bankers); Secondary — price determined by market forces (supply and demand). 4. Benefit: Primary — company gets funds; Secondary — investors get liquidity. 5. Location: Primary — no fixed physical location; through prospectus, merchant bankers; Secondary — conducted on stock exchanges.