Introduction to Financial Markets
- Financial markets deals with the exchange between buyers and sellers in securities market and money market.
Meaning of Securities
- Securities are financial instruments that have some monetary value and can be traded.
- These instruments include shares, debentures, bonds etc.
Features of Securities
- They are issued or sold by Companies, Financial institutions and government to raise funds.
- They are purchased by the public and helps convert savings into profitable investments.
- Issuer of security provides certain rights to investors such as ownership in the company, participation in the management etc.
- They carry certain risks in exchange of returns which can be analysed by investors at the time of purchase.
- They can be transferred or sold any time in the securities market.
Meaning of Security Markets
- The market in which securities are issued, purchased by investors, and transferred among investors is called the securities market
- This market is divided into two markets:
Primary market – It is a market of primary or “new” issue where companies issue their securities to investors.
Secondary Market– Commonly known as stock market, trade in the above, already issued securities enabling transfer or sale of securities by investors.
Participants of security markets:
- Investor– Investors are people or institutions who use their excess funds to purchase securities and thus convert their savings into investments that earn returns. Investors are of two types mainly, retail and institutional investors.
- Retail investors are individuals that invest small sums of money. ex: salaried employees.
- Institutional investors are institutions that invest large amount of money and have specialized knowledge. e.g.: banks, companies, government organisations etc.
- Issuers– Issuers are organisations that issue securities and raise money in order to meet their capital requirements. Securities are issued by taking into consideration the returns to be provided in exchange of using investor’s funds. the following are common issuers in securities markets:
- Companies- issue securities to raise money for expansion of business.
- Financial institutions and banks issue securities for excess capital needs that are not met by deposits or government grants.
- Public sector companies owned by government may issue securities in order to increase the holding of public investors in the company.
- Mutual Funds issue units of security schemes to a group of people and invests their money in stocks, bonds and other securities.
- Initially securities were issued to the public in paper form as certificates that stated investor rights, obligations to be met by issuer etc. These certificates now are stored in electronic form and the process is known as dematerialisation.
- Intermediaries– Intermediaries in the securities markets are agents responsible for coordinating between investors (lenders) and issuers (borrowers), and organizing the transfer of funds between them. They are a link between the investors and issuers and help carry out transactions easily. Some of the intermediaries in the securities markets are listed below:
- Asset management companies
- Portfolio managers
- Merchant bankers
- Stock brokers
- Clearing member of a clearing corporation or house
- Trading members of the derivative segment of a stock exchange
- Bankers to an issue
- Registrars of an issue
- Share transfer agents
- Depository participants
- Custodians of securities
- Trustees of trust deeds
- Credit rating agencies
- Investment advisers
Regulators of Securities Market
SEBI: is known as SECURITIES EXCHANGE BOARD of INDIA (SEBI), a statutory body appointed by an Act ofParliament (SEBI Act, 1992), is the chief regulator of securities markets in India. It ensures and protects interests of investors against any malpractices and unfair trade practices by companies. It performs the following functions:
- Stock exchanges need to send daily monitoring reports and periodic reports to SEBI.
- It monitors the companies in the primary market whether they have fulfilled all required norms and regulations.
- It performs routine inspections of intermediaries and companies to ensure compliance of standardsReserve Bank Of India
(RBI): It handles the issue of securities by the government and regulates the government securities market.
Ministry of Corporate Affairs (MCA): It regulates the issuance of securities by corporate companies.
Ministry Of Finance (MOF): It regulates the issuance and activities of banking, insurance and pension sectors.
Role of Securities Markets
- It provides a channel to transfer funds from millions of investors to borrowers.
- It helps companies to generate funds easily and at a low price
- It allows individuals to turn their ideal savings into productive For e.g. consider the setting up of a large steel plant that is expected to generate jobs and growth for many years. An individual or a single household would not be able to set up the plant, but a company that issues securities to raise funds from many investors would be able to do so. By investing in the plant, investors would benefit from the growth and revenue created by it.
- Securities are liquid assets which means they can be easily traded for money at any given time. This enables investors to invest and disinvest as they require and thus earn profits due to price fluctuations of securities.For e.g. suppose an investor has purchased 100 shares of XYZ Ltd. at Rs.25 per share. After one year the price of the share is quoting at Rs.45 in the market. The investor can opt to sell his shares and earn Rs.20 per share, or a total of Rs.2000 from the sale.
- The prices of securities in secondary market reflect the performance of the company, thus by looking at the prices of securities either rise or fall, investors can evaluate whether the company is making profits or not.