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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
Money lenders
Local bankers Traders
Landlords
Pawn brokers Chit Funds
Money Lender
Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Societies Banks
Joint-Stock Banks
Investors Borrowers
Un-organized Sector
Economy
Regulators
Financial Instruments
Financial Markets
Financial Intermediaries
Forex Market
Capital Market
Money Market
Credit Market
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 .
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.
Defined as short term deposit by way of usance promissory notes. Greater flexibility to investors in the deployment of surplus funds.
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.
RBI and public financial institution can set it either directly or through its existing subsidiaries.
MMMF
Open Ended Close Ended
Market
Instruments
Intermediaries Regulator
SEBI
Primary
Secondary
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
Main Activity
Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.
Equity
Hybrid
Debt
Equity Shares
Preference Shares
ADR / GDR
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.
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
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
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
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
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
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.