Unit 2- Security Market

8/2/2019 Unit 2- Security Market

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SECURITY MARKETSECURITY MARKET


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DEFINITIONDEFINITION

A MARKET IS A PLACE WHERE BUYERS ANDA MARKET IS A PLACE WHERE BUYERS AND

SELLERS INTERACT. ASELLERS INTERACT. A S E C U R I T Y M A R K E TE C U R I T Y M A R K E T IS AIS APLACE WHERE BUYING AND SELLING OFPLACE WHERE BUYING AND SELLING OF

SECURITIES TOOK PLACE.SECURITIES TOOK PLACE.

A PHYSICAL PLACE WHERE BUYERS AND SELLERSA PHYSICAL PLACE WHERE BUYERS AND SELLERS

CAN MEET IS NOT AN ESSENTIAL CONTITUENT OFCAN MEET IS NOT AN ESSENTIAL CONTITUENT OF

A MARKET.A MARKET.


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THE MECHANISM OR SYSTEM THROUGH WHICHTHE MECHANISM OR SYSTEM THROUGH WHICH

FINANCIAL ASSETS ARE CREATED ANDFINANCIAL ASSETS ARE CREATED AND

TRANSFERRED IS KNOWN ASTRANSFERRED IS KNOWN AS FINANCIALINANCIALMARKETARKET ..

WHEN THE FINANCIAL ASSETS TRANSFERRED AREWHEN THE FINANCIAL ASSETS TRANSFERRED ARE

CORPORATE SECURITIES AND GOVERNMENTCORPORATE SECURITIES AND GOVERNMENT

SECURITIES, THE MECHANISM OF TRANSFER ISSECURITIES, THE MECHANISM OF TRANSFER IS

KNOWN ASKNOWN AS SECURITIES MARKETECURITIES MARKET ..


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TYPES OF MARKETTYPES OF MARKET

PRIMARY MARKETPRIMARY MARKET

SECONDARY MARKETSECONDARY MARKET


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SECURITYSECURITY

A SECURITY IS AN INSTRUMENT OF PROMISSORYA SECURITY IS AN INSTRUMENT OF PROMISSORY

NOTE OR A METHOD OF BORROWING ORNOTE OR A METHOD OF BORROWING OR

LENDING OR A SOURCE OF CONTRIBUTING TOLENDING OR A SOURCE OF CONTRIBUTING TO

THE FUNDS NEEDED BY A CORPORATE BODY ORTHE FUNDS NEEDED BY A CORPORATE BODY ORNON-CORPORATE BODY.NON-CORPORATE BODY.


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AN OVERVIEW OF SECURITY MARKETAN OVERVIEW OF SECURITY MARKET


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COMPONENTS OF SECURITYCOMPONENTS OF SECURITY

MARKETMARKET

SECURITIES- SHARES, BONDS, DEBENTURES,SECURITIES- SHARES, BONDS, DEBENTURES,

DERIVATIVES, MF ETC.DERIVATIVES, MF ETC.

INTERMEDIARIES- BROKERS, SUB-BROKERS,INTERMEDIARIES- BROKERS, SUB-BROKERS,

CUSTODIANS, MERCHANT BANKERS ETC.CUSTODIANS, MERCHANT BANKERS ETC. ISSUER OF SECURITIES- COMPANIES,ISSUER OF SECURITIES- COMPANIES,

GOVERNMENT, BANKS ETC.GOVERNMENT, BANKS ETC.

INVESTORS- INDIVIDUAL, CORPORATE,INVESTORS- INDIVIDUAL, CORPORATE,FINANCIAL INSTITUTIONS, FIIs ETC.FINANCIAL INSTITUTIONS, FIIs ETC.

MARKET REGULATOR- SEBI, DEPARTMENT OFMARKET REGULATOR- SEBI, DEPARTMENT OF

COMPANY AFFAIRS, RBI.COMPANY AFFAIRS, RBI.


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TYPE OF SECURITIESTYPE OF SECURITIES

DEBT SECURITIESDEBT SECURITIES

EQUITY SECURITIESEQUITY SECURITIES

DERIVATIVES CONTRACTSDERIVATIVES CONTRACTS


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INTERMEDIARIESINTERMEDIARIES

Intermediaries provide various services toinvestors and issuers and have grown to becomeamong both powerful and knowledgeable due to

substantial growth of securities markets over thelast century.

A large variety and number of intermediariesprovide intermediation services in the Indiansecurities market.


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ISSUER OF SECURITIESISSUER OF SECURITIES

Every organisation, whether if be a company,institution or a Government body needs funds forvarious operations. Organisations issue securities in

the primary market depending on their needs.

The Securities market in India is an importantsource for corporate and government. Thecorporate sector does depend significantly onequity and debt markets for meeting its fundingrequirements.


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INVESTORINVESTOR

INVESTORS ARE THOSE WHO HAVE EXCESS FUNDSINVESTORS ARE THOSE WHO HAVE EXCESS FUNDS

WITH THEM AND WANT TO EMPLOY IT FORWITH THEM AND WANT TO EMPLOY IT FOR

RETURNS. THEY ARE THE BACKBONE OF EVERYRETURNS. THEY ARE THE BACKBONE OF EVERY

ECONOMY.ECONOMY.

THEY MAY BE CATEGORIES AS INDIVIDUAL,THEY MAY BE CATEGORIES AS INDIVIDUAL,

INSTITUTIONAL, FIIs ETC.INSTITUTIONAL, FIIs ETC.


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MARKET REGULATORSMARKET REGULATORS

SECURITY MARKET IS REGULATED BY FOLLOWINGSECURITY MARKET IS REGULATED BY FOLLOWING

BODIES:BODIES:

SEBISEBI RBIRBI

DEPARTMENT OF ECONOMIC AFFAIRSDEPARTMENT OF ECONOMIC AFFAIRS

DEPARTMENT OF COMPANY AFFAIRSDEPARTMENT OF COMPANY AFFAIRS STOCK EXCHANGESSTOCK EXCHANGES


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SEGMENTS OF SECURITY MARKETSEGMENTS OF SECURITY MARKET

CAPITAL MARKETCAPITAL MARKET

MONEY MARKETMONEY MARKET


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CAPITAL MARKETCAPITAL MARKET

CAPITAL MARKET IS THE MARKET SEGMENTCAPITAL MARKET IS THE MARKET SEGMENT

WHERE SECURITIES WITH MATURITY PERIOD OFWHERE SECURITIES WITH MATURITY PERIOD OF

MORE THAN ONE YEAR ARE BOUGHT AND SOLD.MORE THAN ONE YEAR ARE BOUGHT AND SOLD.

EQUITY SHARES, PREFERENCE SHARES,EQUITY SHARES, PREFERENCE SHARES,

DEBENTURES AND BONDS ARE THE LONG-TERMDEBENTURES AND BONDS ARE THE LONG-TERM

SECURITIES TRADED IN THE CAPITAL MARKET.SECURITIES TRADED IN THE CAPITAL MARKET.

CAPITAL MARKET IS THE SOURCE OF LONG-TERMCAPITAL MARKET IS THE SOURCE OF LONG-TERM

FUNDS FOR BUSINESS AND INDUSTRIES.FUNDS FOR BUSINESS AND INDUSTRIES.


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MONEY MARKETMONEY MARKET

MONEY MARKET IS THE MARKET FOR SHORT-TERMMONEY MARKET IS THE MARKET FOR SHORT-TERM

FINANCIAL ASSETS WITH MATURITY PERIOD OFFINANCIAL ASSETS WITH MATURITY PERIOD OF

ONE YEAR OR LESS.ONE YEAR OR LESS.

TREASURY BILLS, COMMERCIAL PAPER,TREASURY BILLS, COMMERCIAL PAPER,CERTIFICATE OF DEPOSITS ETC. ARE THE SHORT-CERTIFICATE OF DEPOSITS ETC. ARE THE SHORT-

TERM SECURITIES TRADED IN THE MONEYTERM SECURITIES TRADED IN THE MONEY

MARKET.MARKET.

AS THESE INSTRUMENTS ARE CLOSE SUBSTITUTESAS THESE INSTRUMENTS ARE CLOSE SUBSTITUTES

FOR MONEY, THE MARKET FOR THEIR TRADING ISFOR MONEY, THE MARKET FOR THEIR TRADING IS

KNOWN AS MONEY MARKET.KNOWN AS MONEY MARKET.


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MONEY MARKET IS THE MAIN SOURCE OFMONEY MARKET IS THE MAIN SOURCE OFWORKING CAPITAL FUNDS FOR BUSINESS ANDWORKING CAPITAL FUNDS FOR BUSINESS ANDINDUSTRY.INDUSTRY.

IT PROVIDES A MECHANISM FOR SETTELING OUTIT PROVIDES A MECHANISM FOR SETTELING OUTSHORT-TERM SURPLUSES AND DEFICITS.SHORT-TERM SURPLUSES AND DEFICITS.

AS MOST OF THE SECURITIES IN THE MONEYAS MOST OF THE SECURITIES IN THE MONEYMARKET ARE OF LARGE DENOMINATIONS, SOMARKET ARE OF LARGE DENOMINATIONS, SOTHEY ARE OUT OF THE REACH OF INDIVIDUALTHEY ARE OUT OF THE REACH OF INDIVIDUALINVESTORS.INVESTORS.

THE MAIN PLAYERS IN MONEY MARKET ARETHE MAIN PLAYERS IN MONEY MARKET AREMOSTLY FINANCIAL INSTITUTIONS.MOSTLY FINANCIAL INSTITUTIONS.


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SECURITIES IN MONEY MARKETSECURITIES IN MONEY MARKET

TREASURY BILLSTREASURY BILLS

CERTIFICATE OF DEPOSITS(CD)CERTIFICATE OF DEPOSITS(CD)

COMMERCIAL PAPER(CP)COMMERCIAL PAPER(CP)

REPO AND REVERSE REPOREPO AND REVERSE REPO


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TREASURY BILLTREASURY BILL

Treasury Bills (T-bills) are the most marketableTreasury Bills (T-bills) are the most marketable

money market security. It represents the simplestmoney market security. It represents the simplest

form of borrowing.form of borrowing.

T-Bills are issued by the Government. TheT-Bills are issued by the Government. Thegovernment raise money by selling T-bills to public.government raise money by selling T-bills to public.

Investors by T-bills at a discount from the statedInvestors by T-bills at a discount from the stated

maturity value. At the maturity, the holder receivesmaturity value. At the maturity, the holder receives

the payment equal to the face value of the bill.the payment equal to the face value of the bill.

The difference between the purchase price and theThe difference between the purchase price and the

face value is the investors earning.face value is the investors earning.


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T-bills are issued with three-month, six-monthT-bills are issued with three-month, six-month

and one-year maturities.and one-year maturities.

Face value of T-bills is Rs100 and they are availableFace value of T-bills is Rs100 and they are availableat a minimum amount of Rs25000.at a minimum amount of Rs25000.

The only downside to T-bills is that you won't get aThe only downside to T-bills is that you won't get agreat return because Treasuries are exceptionallygreat return because Treasuries are exceptionally

safe.safe.


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CERTIFICATE OF DEPOSITCERTIFICATE OF DEPOSIT

A certificate of deposit (CD) is a time deposit with aA certificate of deposit (CD) is a time deposit with a

bank. CDs are generally issued by commercialbank. CDs are generally issued by commercial

banks.banks.

CDs are issued at a discount to the face value. TheyCDs are issued at a discount to the face value. Theyare issued in denominations of Rs1 lakhs.are issued in denominations of Rs1 lakhs.

Maturity period of CDs ranges between 14 days to 1Maturity period of CDs ranges between 14 days to 1

year.year.

CDs offer a slightly higher yield than T-Bills becauseCDs offer a slightly higher yield than T-Bills because

of the slightly higher default risk for a bank but.of the slightly higher default risk for a bank but.


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COMMERCIAL PAPERCOMMERCIAL PAPER

Highly rated companies (with credit rating of P2 andHighly rated companies (with credit rating of P2 and

above in India) can issue short term unsecured debtabove in India) can issue short term unsecured debt

notes known as Commercial Papers.notes known as Commercial Papers.

CPs are issued in denomination of Rs5 lakhs orCPs are issued in denomination of Rs5 lakhs ormultiple thereof. They are also issued at a discountmultiple thereof. They are also issued at a discount

to the face value.to the face value.

Maturity period of CPs range between 15 days to 1Maturity period of CPs range between 15 days to 1

year.year.


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REPOS AND REVERSE-REPOSREPOS AND REVERSE-REPOS

Repos are usually overnight borrowing. In a repoRepos are usually overnight borrowing. In a repo

transaction one transfer government securities to antransaction one transfer government securities to an

investor on an overnight basis, with an agreement toinvestor on an overnight basis, with an agreement to

buy back those securities at a slightly higher price.buy back those securities at a slightly higher price. The increase in price is the interest for the repoThe increase in price is the interest for the repo

period.period.

The minimum period for repo is one day.The minimum period for repo is one day.

The reverse repo is the complete opposite of a repo.The reverse repo is the complete opposite of a repo.

In this case, a dealer buys government securities fromIn this case, a dealer buys government securities from

an investor and then sells them back at a later date foran investor and then sells them back at a later date for

a higher price.a higher price.


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TYPES OF FINANCIAL MARKETTYPES OF FINANCIAL MARKET

PRIMARY MARKETPRIMARY MARKET

SECONDARY MARKETSECONDARY MARKET


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PARTICIPANTSPARTICIPANTS

In the financial markets, there is a flow of fundsIn the financial markets, there is a flow of funds

from one group of parties (funds-surplus units)from one group of parties (funds-surplus units)

known asknown as Investorsnvestors to another group (funds-to another group (funds-deficit units) which require funds known asdeficit units) which require funds known asBorrowersorrowers ..

However, often these groups do not have directHowever, often these groups do not have direct

link. The link is provided by market intermediarieslink. The link is provided by market intermediaries

such as brokers, mutual funds, leasing and financesuch as brokers, mutual funds, leasing and financecompanies, etc. There is a large number of playerscompanies, etc. There is a large number of players

and participants in the financial market. These canand participants in the financial market. These can

be grouped as follows :be grouped as follows :


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INDIVIDUALS OR INVESTORSINDIVIDUALS OR INVESTORS

These are net savers and purchase the securitiesThese are net savers and purchase the securities

issued by corporate.issued by corporate.

Individuals provide funds by subscribing to theseIndividuals provide funds by subscribing to thesesecurity or by making other investments.security or by making other investments.


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CORPORATE OR ISSUERSCORPORATE OR ISSUERS

The corporates are net borrowers. They requireThe corporates are net borrowers. They require

funds for different projects from time to time.funds for different projects from time to time.

They offer different types of securities to suit theThey offer different types of securities to suit the

risk preferences of investors.risk preferences of investors. The income generated by deployment of funds isThe income generated by deployment of funds is

distributed as interest or dividends to the investorsdistributed as interest or dividends to the investors

who own the securities.who own the securities.


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GOVERNMENTGOVERNMENT

Government may borrow funds to take care of theGovernment may borrow funds to take care of thebudget deficit or as a measure of controlling thebudget deficit or as a measure of controlling theliquidity, etc.liquidity, etc.

Government may require funds for long termsGovernment may require funds for long terms(raised by issue of Government loans) or for short-(raised by issue of Government loans) or for short-terms for maintaining liquidity in the money market.terms for maintaining liquidity in the money market.

Government makes initial investments in publicGovernment makes initial investments in publicsector enterprises by subscribing to the shares,sector enterprises by subscribing to the shares,however, these investments (shares) may be sold tohowever, these investments (shares) may be sold topublic through the process ofpublic through the process ofDisinvestmentsisinvestments ..


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REGULATORSREGULATORS

Financial system is regulated by differentFinancial system is regulated by differentgovernment agencies. The relationships amonggovernment agencies. The relationships among

other participants, the trading mechanism and theother participants, the trading mechanism and the

overall flow of funds are managed, supervised andoverall flow of funds are managed, supervised and

controlled by these statutory agencies.controlled by these statutory agencies.

In India, two basic agencies regulating the financialIn India, two basic agencies regulating the financial

market are the Reserve Bank of India (RBI ) andmarket are the Reserve Bank of India (RBI ) and

Securities and Exchange Board of India (SEBI).Securities and Exchange Board of India (SEBI). SEBI has a primary responsibility of regulating andSEBI has a primary responsibility of regulating and

supervising the capital market.supervising the capital market.


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It has issued a number of Guidelines and Rules forIt has issued a number of Guidelines and Rules for

the control and supervision of capital market andthe control and supervision of capital market and

investors protection.investors protection.

Reserve Bank of India, being the Central Bank hasReserve Bank of India, being the Central Bank has

the primary responsibility of maintaining liquidity inthe primary responsibility of maintaining liquidity in

the money market. It undertakes the sale andthe money market. It undertakes the sale andpurchase of T-Bills on behalf of the Government ofpurchase of T-Bills on behalf of the Government of

India.India.

Besides, there is an array of legislations andBesides, there is an array of legislations and

government departments also to regulate thegovernment departments also to regulate the

operations in the financial system.operations in the financial system.


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MARKET INTERMEDIARIESMARKET INTERMEDIARIES

There are a number of market intermediariesThere are a number of market intermediariesknown as financial intermediaries operating inknown as financial intermediaries operating in

financial system.financial system.

The objective of these intermediaries is toThe objective of these intermediaries is to

smoothen the process of investment and tosmoothen the process of investment and to

establish a link between the investors and the usersestablish a link between the investors and the users

of funds.of funds.

Corporations and Governments do not market theirCorporations and Governments do not market theirsecurities directly to the investors. Instead, theysecurities directly to the investors. Instead, they

hire the services of the market intermediaries tohire the services of the market intermediaries to

represent them to the investors.represent them to the investors.


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Market intermediaries help investors to selectMarket intermediaries help investors to select

investments by providing investment consultancy,investments by providing investment consultancy,

market analysis and credit rating of investmentmarket analysis and credit rating of investment

instruments.instruments.

In order to operate in secondary market, theIn order to operate in secondary market, the

investors have to transact through share brokers.investors have to transact through share brokers.Mutual funds and investment companies pool theMutual funds and investment companies pool the

funds (savings) of investors and invest the corpus infunds (savings) of investors and invest the corpus in

different investment alternatives.different investment alternatives.


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VARIOUS MARKET INTERMEDIARIESVARIOUS MARKET INTERMEDIARIES

Lead ManagersLead Managers

Bankers to the IssueBankers to the Issue Registrar and Share Transfer AgentsRegistrar and Share Transfer Agents DepositoriesDepositories

Clearing CorporationsClearing Corporations Share brokersShare brokers Credit Rating AgenciesCredit Rating Agencies UnderwritersUnderwriters

CustodiansCustodians Portfolio ManagersPortfolio ManagersMutual FundsMutual Funds Investment CompaniesInvestment Companies

Documents

Unit 2- Security Market