Embed Size (px)
Citation preview
BUSINESS FINANCE
Business need finance at the point of the business man decides to start it. Business need finance for purchasing fixed assets (fixed capital) and payment for raw materials and salary to employees( working capital)
Finance is the life blood of business.
CONCEPT OF FINANCIAL MARKET
Business is a part of an economic system. An economic system consists of two main sector-a) house holds – save funds
b) businee- use these fundFinancial market collect fund from the house holds and
allocate to the business. This process is called as financial intermediation.
There are two major mechanisms for functioning financial intermediation, they are banks and financial markets.
Financial market
• Financial Market is the market for creation and exchange of financial assets. Creation of financial assets means new issues of shares, debentures, derivatives etc. exchange of financial assets means purchase and sale of existing financial assets
Functions of financial market1. Mobilisation of savings and channelising them into most productive
uses:- financial market collect finance from households and allocating to business purpose. It convert savings to investment
2. Facilitating price discovery:- demand and supply fixes the price for a commodity. House holds are the supplier of fund and the business demand the fund. As an intermediary financial market can discover the price of finance.
3. Providing liquidity to financial assets:- liqudity means the ability to convert an assets into cash. By providing easy facility to purchase and sale of financial assets, financial market do this
4. Reducing the cost of transactions:- financial markets provide valuable information about the price of financial assets and its variability to investors. This helps them to reduce cost of transactions.
Classification of financial market
Money market
Money market is a market for short term fundsit deals with monetory assets whose period of maturity is less than one year. The instruments of money market includes Treasury bill, Commercial paper, Call money, Certificate of deposit, Commercial bill, partiipation certtficates and money market mutual funds.the major participants in the market are the RBI, Commercial Banks, Non Banking Finance Companies, state governments, Large Corporates and Mutual Funds
Money market instruments
1. Treasury bill2. Commercial paper3. Call money4. Certificate of deposit5. Commercial bill6. Partiipation certtficates, and7. money market mutual funds
1. Treasury bill
it is also known as T-Bill and Zero Coupen Bond. It is issued by RBI on behalf of the Government. Its maturity period is less than one year. It is issued in the form of promissory note. The minimum amount of T-bill is 25000 and its multiple thereof. It is issued at discount and repaid at par. For eg. an investor purchase a 91 days T-bill having face value of Rs 100000 for 90000. after 91 days the investo will get Rs 100000. the difference of 10000 is the benefit of the investor.
2. Commercial paperIt is issued by large and credit worthy companies to raise short term finance. Its maturity period is 15 days to one year. It is issued in the form of unsecured promissory notes. It is issued at discount and repaid at par. Companies use this for Bridge financing.for raising long term capital from the financial market business need to meet some floatation costs. By issuing commercial paper company can meet this floation costs it is called bridge finance.
3. Call money
Call money is a short term finance repayable on demand, with a maturity period of 1 day to 15 days. It is used for inter bank transactions. Mainly for maintaining CRR as per the RBI guidelines. The interest on call money is called as call rate.
4. Certificates of Deposits
CDs are unsecured, negotiable short term instruments in bearer form, issued by commercial banks. The minimum amount of CD is 1 lakh and its multiple thereof. Maturity period is minimum not less than 7 days and not more than one year. It is issued at a discount and repaid at par.
5. Commercial bill
It is bill of exchange used to finance woring capital requirements. It is a short term self liquidating instrument which is used to finance the credit sales.
CAPITAL MARKET
Capital market is the market which deals in long and medium term funds. Individual investors and institutional investors are the major suppliers of funds into the capital market. They deals with ownership securities and creditor ship securities. Shares, debentures, bonds and other wide range of securities are dealt in capital market.
Distinction between capital market and money market
Money market Capital market
1. Dealing with short term funds 1. Dealing with long term funds
2. Provide finance for working capital 2. Provide for fixed capital
3. It is a whole sale market 3. It is a retail market
4. It has no active secondary market 4. It has a strong secondary market
5. It is regulated by RBI through DFHI 5.It is regulated by SEBI
6. T-bill, CPs, CDs are the main instruments
6. Shares, debentures, derivatives ets are the the instruments
7. Face value is high 7. Face value is very low
8. Higher degree of liquidity 8. Lower degree of liquidity
9. High safety 9. Low safety
10. Low return High return
Primary market
The primary market is also known as New Issue Market (NIM). It is the market where the securities are sold for the first time.
Methods of floatation
there are various methods of floating new issues in the primary market.
1. Offer through prospectus
in this method companies inviting the people to subscribe their shares through a prospectus which contains the detail regarding the company
Offer for sales
3. Private placemen
4. Right issue
e- IPOs
Electronic Initial Public Offer means floatation of securities in the primary market with the help of computer and its net working system
stock exchange
A stock exchange is an institution which provides a platform for buying and selling of existing securities. Stock exchange facilitates the exchange of securities into cash and vuce versa
Stock exchange meaning
Functions of secondary market
1. Providing liquidity and marketability to existing securities
2. Pricing of securities3. Safety of transactions4. Contributes to economic growth5. Spreading of equity cult-creating good about
securities in ithe investors6. Providing scope for speculation
Trading and settlement procedure
in the beginning securites were bought and sold under an “open outsry system”trading of securites is now executed through an online screen based electronic trading system. Simply put all buying and selling of shares and debebtures are done through a computer terminal.
NSE (National Stock Exchange) operates on the “National Exchange for Automated Trading” (NEAT)
BSE (Bombey Stock Exchange) operates on the “BSE”s Online Trading system(BOLT)
Advantagesof Electronoc Trading system or Online Trading system
1. Transperency2. Efficient passing of information3. Efficiency in operation4. It facilitate all scatered over the world to
purchase and sell securities5. It facilitate a single platform for all trading
centers on the computer.
Steps in the Trading and Settlement Procedure
The folowing are the steps to be followed by a proposed investors in the stock excahnge
1. Enter in to a contract between a broaker or sub broaker. They should provide certaindetail as follows;• PAN ( compulsory)• DOB and addresproof• Residential status• Bankaccount details• Depository account details
The broaker then opens a trading account in the nameof the investor.
2. Open a ‘demat’ account or ‘Benificial Owner’ (BO) account with a Depository Participant (DP)
3. The investor then places order with the broaker to buy or sell securities
4. Asper the order placed by the investor broaker connect this order with the main stockexchange
5. When the order match with mentioned price , it will communicated to the broaker’s terminal and the order will be executed electronically
6. After the trade has been executed, with in 24 hours the broaker issues a contract note. This note contains al about the trade and it is an important doccument having legal protection
7. now the investor has to deliver shares for the share sold or pay cash for the share bought. This should be done immediately after getting the contract note or before making payment by the broaker or delivery of shares to the exchange. This is called ‘pay-in-day’ . This settlement is done on the basis of “T+2” settlement. For eg. Transaction on Mondey will settle on Wednesday. Tuesday transaction on Thursday. w.e.f 1 April 2003
8. On the T+2 day theexchange will deliver the share or make mapyment to the other broaker. This is called ‘pay-out-day’
9. The broaker can make delivery of shares in de-mat formdirectly to the investor’s de-mat account.
dematerialization
Dematerialization is the process of transforming physical form of securities into electronic form.
Depository DepositoryParticipant
Registrar Investor
Steps of dematerialization
1. investors surrender certificates to DP for dematerialization
2. DP informs the Depository through electronic media3. DP sent the certificate to the Registrar for verification
and cancellation4. Depository sends formal request for de-
materialization to the Registrar5. Registrar informs Depository and electronic credit
given to the customers6. Depository updates its account and informs the DP
concerned7. DP informs customer about the credit in its account
Depository services
A depository is an organization where securities of share holder are held in electronic form at the request of the holder through Depository Participant (DP). Depository Participant is an intermediary or the agent of the investor in the depository system providing link between company and he client through depository. In India two Depositories are operating viz, National Securities Depositary Limited (NSDL) & Central Depository Services Limited (CDSL)
Stock exchange
• The National Stock Exchange (NSE) is the leading stock exchange in India and the fourth largest in the world by equity trading volume in 2015, according to World Federation of Exchanges (WFE). NSE was incorporated in 1992. It was recognised as a stock exchange by SEBI in April 1993 and commenced operations in 1994. NSE covers 364 cities and town across the counntry. NSE follows Automated Trading System (ATS) called NEAT (National Exchange for Automated Trading)
Objectives of NSE
1. Establishing a network trading facility for all types of securities
2. Ensure equal accesss to all over the country through an appropriated communication network
3. Providing a fair, efficient and transperant securities market
4. Enabling shorter settlement cycles5. Meeting international benchmarks and standards
Market segment of NSE
There are two marketing segmant;1. Whole sale Debt marketing segment- deals
with wide range of fixed income bearing securities of state and central government and large corporations. T-bills, CDs, commercial papers, Mutual Fund etc.
2. Capital market segment- provide an efficient and trading platform for equities, preference shares, debentures, ExchangeTraded Funds etc.
Over The Counter Exchange of India (OTCEI)
OTCEI is a stock market for small companies having paid up capital of less than 3 crores. It was started in 1992. incorporated under Companies Act 1956. this is established on the lines of NASDAQ (National Association of Securities Dealers Automated Quotations) OTCEI was promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI capital market and Can Bank financial service. It fully computerized, transparent and single window exchange.it provide a place where buyer seeks sellers and vice-versa then transact with each other.
Advantages of OTCEI
1. Provide a platform to small and less liquid companies which can not list in a regular stock exchange for raising capital
2. Lower cost of new issue and ower expenses ofservicing the investors
3. Family concerns and closely held companies can go through OTC
4. It provide greater freedom to the investors5. It provide higher transperancy6. Provide valuable information
Comparison between primary market and secondary market
PRIMARY MARKET SECONDARY MARKET
1. it deals with new securities2. Securities are sold only once3. It links the issuing company and
the investors4. Investors can only purchase the
securities5. It provides capitals to the
companies6. It does not have any physical;
existence
1. it deals with existing securities2. It provides regular and continuous
market3. Transactions are made with in the
investors4. Investors can purchase and sell
securities5. Issuing company does not have
any direct role6. Stock exchange has physical
existence
• Listing:- admission of a company for trading its securities in the stock exchange. Government securities need not to be listed in the official list of the stock exchange. Only listed company’s shares are traded in the stock exchanges.
(Students corner )• Open out cry system• Offer price• Bid price• Online trading
Management of stock exchange
Picture of stock exchange structure
speculation
It is the process of buying securities when price is low and selling securities when price is high. Speculator is a person who conduct speculation for making profit from the price differences of securities
Types of speculator1. Bull:- a bull speculator expect a raise in the price so they buy
this shares and sell when raise the price. The market dominated by bull is known as bullish market
2. Bear:- a bear speculator expect a fall in the price so they sell this shares and purchase when fall the price. The market dominated by bear is known as bearish market
3. Lame duck:- lame duck is a bear speculator. He is so called because of the non availability of shares that he has agreed to sell
4. Stag:- stag is a premium hunter. He apply for shares in the NIM and after getting allotment he sells the same at a higher price.
Major stock exchanges in India
prepare a report on this topic Source ; inter net news paper books etcInclude the history of stock exchange in India
Bombey Stock Exchange (BSE)
BSE is the first stock exchange in Asia, established in 1875 by Native Share Stock Brokers Association. It is the first stock exchange in India, obtained permanent recognition in 1956 under the Securites Contract Regulation Act, 1956 (SCRA).
Objectives of BSE
1. To provide an efficient and transperant securities marketing
2. To provide a trading platform for small and medium enterprises
3. To ensure safety4. Provide service to capital market participants like risk
management, clearing, settlement, market date, and education
the BSE has about 5000 companies listed from all over the world and has the largest market capitalisation in India
Securites and Exchange Board of India (SEBI)
The SEBI was established in 12 april 1988 as an adivisory body to promote healthy securities marketing. 1980 s characterised as tremendous growth in securities marketing and it leads to capital market scam (1991) To solve this the government of India by an ordinance SEBI was given statutory status. The ordinance later became an Act namely Securites and Exchange Board of India (SEBI) Act 1992. it is head quarted in Mumbai with regionl offices in Delhi,Kolkatta, Chennai and Ahemmadabad
Porpose and role of SEBI
1. To the issures provide a safety market place for securities trading
2. To the investors, provide protection3. To intermediaries, offer competitive,
professionalised and expand market
Objectives of SEBI
1. To regulate stock exchanges and the securities industry to promote their orderly functioning
2. To protect the right and interest of the investors
3. To prevent trading malpractices4. To regulate and develop a code of conduct
and fair practices.
Functions of SEBI
1. Regulatory function1. Registration of broakers and sub broakers and other plaayers in
the market2. Registration of mutual funds3. Regulation of stock broakers, portfolio exchanges, underwriters,
merchant bankers and buusiness4. Regulation of takeover bids by companies5. Conducting enquireis and audits of stock exchanges6. Levying fee or other charges for carrying out the ppurpoose oof
the Act7. Performing the power as per
SecuritiesContract(Regulation)Act1956.
B) Development function1. Training of intermediaries of the security market2. Conducting research and publishing information3. Develop the capital market
C) Protective functions4. Prohibition of frdulant and unfair trade practices like
misleading statement, manipulations, price rigging etc5. Controlling the insider trading and imposing penalties6. Undertaking steps for investor protection7. Promotion of fair trade practices in securities market
The organisation structure of SEBIThe board consists of nine members under a chairman. (sri U K Sinha present chairman). SEBI classified its functions under various operatonal departments headed by an executive director. SEBI also setup two advisory committee. They are primary market advisory committee and secondary market advisory committee. The objectives of these two committees are as follows;– To advice SEBI on matters relating to protect the iterest of the investors– To advice the SEBI on issues related to the development of primary
market in India– To advice SEBI on disclosure requirements for companies
