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S.Y.B.COM
•
• Money is usually defined as anything which isgenerally acceptable as payment for goods andservices 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 commercialrelations that each can easily acquaint himself withthe rate at which certain kinds of exchange s of
goods & services are from time to time made by theothers.
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Financial System
• Financial system includes all thoseactivities 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
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Financial Market
Defined as the market in which financialassets 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.
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Financial System of any countryconsists of financial markets,
financial intermediation andfinancial instruments or financialproducts
Suppliers of funds
(Mainly households)Flow of financial services
Incomes , and financial
claims
Seekers of funds
(Mainly business firms
and government)
Flow of funds (savings)
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Indian Financial System
Non- Organized
Organized Money lenders
Local bankers
Traders
Landlords
Pawn brokers
Chit Funds
Regulators
Financial Institutions
Financial Markets
Financial services
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Barter
Money Lender
Nidhi's/Chit Funds
Indigenous Banking
Cooperative Movement
Societies Banks
Joint-Stock Banks
Evolution of Financial System
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Consolidation
Commercial Banks
Nationalization
Investment Banks
Development Financial Institutions
Investment/Insurance Companies
Stock Exchanges
Market Operations
Specialized Financial Institutions
Merchant Banking
Universal Banking
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Financial System
Savers Lenders Households Foreign
Sectors
Investors
Borrowers
Corporate Sector
Govt.Sector
Un-organized
Sector
Economy
Interrelation--Financial system & Economy
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Organized Indian Financial System
Money MarketInstrument
Capital MarketInstrument
Forex
Market
Capital
Market
Money
Market
Credit
Market
Primary Market
FinancialInstruments
FinancialMarkets
FinancialIntermediaries
Secondary Market
Regulators
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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.
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Main FunctionTo channelize savings into short term productive
investments like working capital .
Instruments in Money MarketCall money market
Treasury bills market
Markets for commercial paperCertificate of deposits
Bills of Exchange
Money market mutual funds
Promissory Note
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Purpose of the moneymarket
• Banks borrow in the money market to:• Fill the gaps or temporary mismatch of
funds
• To meet the CRR and SLR mandatoryrequirements as stipulated by the centralbank
• To meet sudden demand for funds arisingout of large outflows (like advance tax
payments)
• Call money market serves the role of equilibrating the short-term liquidity position
of the banks
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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 thestated period from the date of issue
• They are issued at discount to the face value and atthe 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, 182-
day T-Bills and 364-day T-Bills on a fortnightly basison behalf of the central government
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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.
Im arts a de ree of financial stabilit to the s stem.
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Defined as short term deposit by way of usance promissory
notes.
Greater flexibility to investors in the deployment of surplus
funds.
Permitted by the RBI to banks
Maturity of not less than 3 months and upto 1 year.
Transferable in nature
Free negotiability and limited flexibility
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Referred as note payable in accounting
It is a contract detailing the terms of a promise by oneparty (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 purchaseprice might be a combination of an immediate cashpayment and one or more promissory notes for thebalance.
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Invest primarily in money market instruments of very high quality.
RBI and public financial institution can set iteither directly or through its existing subsidiaries.
MMMFOpen Ended
Close Ended
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Indian Capital Market
Market Instruments Intermediaries
Primary Secondary
Equity DebtHybrid
Regulator
•Brokers•Investment Bankers•Stock Exchanges•Underwriters
SEBI
Players
Corporate IntermediariesCRABanks/FI FDI /FIIIndividual
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Provided resources needed by medium andlarge scale industries.
Purpose for these resourcesExpansion
Capacity Expansion
Investments
Mergers and Acquisitions
Deals in long term instruments and sources offunds
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Main Activity
Functioning as an institutionalmechanism to channelize funds from
those who save to those who needed for
productive purpose.
Provides opportunities to various class of
individuals and entities.
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Capital Market Instruments
ADR / GDR
Equity Debt
Equity
SharesPreference
SharesDebentures Zero coupon
bonds
Deep
Discount
Bonds
Hybrid
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Primary Markets Secondary MarketsWhen companies need financial resourcesfor its expansion, they borrow money frominvestors through issue of securities.
The place where such securities are tradedby these investors is known as the secondarymarket.
Securities issued
a)Preference Shares
b)Equity Shares
c)Debentures
Securities like Preference Shares andDebentures cannot be traded in thesecondary market.
Equity shares is issued by the under writersand merchant bankers on behalf of thecompany.
Equity shares are tradable through a privatebroker or a brokerage house.
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
Securities that are traded are traded by theretail investors.
One time activity by the company. Helps in mobilising the funds for the
investors in the short run.
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Management of issues inprimary market
• Public issue
• Right issue
• Issue of bonus shares
• Private placements
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Public issue
• Must pass a resolution in themeeting of the BOD
• Merchant banker at least 21days prior to the filing of prospectus with the registrar of the co.
• 1) pre issue obligation
• 2) post issue obligation
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Issue of right shares
• When an existing co makesfurther issue of share, it is
compulsory for it to offer themto existing sh.holders inproportion to their present
holding.
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Procedure for issuing
right shares• Decision taken by BOD• The terms of issue also specified• Necessary information is field with registrar within
30 days of the passing of the resolution
• Secretary prepares a list of members who areentitled to the shares and no. of shares to beoffered
• Secretary will prepare a list of members who haveconsented to subscribe for the shares offered tothem
• All shares disposed off ,the sec. will prepare sharecertificate
• Letter of allotment is filed in the prospectus• Necessary alteration are make in MOU
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Issue of bonus shares
• It is prudent policy on the partof the co. not to distribute its
entire profit as dividend tosh.hol. but to transfer a portionof such profit to reserves to
meet unknown contingenciesand to strengthen the financialposition of the co.
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Sources of bonus share
• Credit balance of p&l a/c
• General reserve
• Balance of debenture redemptionfund or sinking fund
• Capital redemption reserve a/c
• Share premium a/c• Profit on acquisition of buss.
• Profit on sale of fixed assets
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Procedure for issuing
bonus shares• A decision taken by the BOD
• Secretory prepare a list of shareholders
• Letter of allotment are dispatched to
sh.hol.similar like issue of further share,except application are not invited
• Sh.hol. Are advised to get them inexchange of letters of allotment.
• A retuen of allotment is field with redistrar •
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Private placements
• Funds are raised in the primary market byselling the securities to the investorseither singly or institutionally.
• Simplicity• Less issue expense• Flexibility• Prompt collection of funds• Response is private matter
• SecrecyInstitutional investors like mutual funds,LIC,GIC, DEVELOPMENT BANKS etc.
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Stock exchange
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Definition
• Stock exchange is an association or bodyof individuals, whether incorporate or notestablished 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 oncomission and are guided by certain rules& usages. Shri k.l. garg
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Characteristic of Stock
Exchange• Voluntary association
• Provides facilities for dealing
• Strict standard of membership• Management by governing
board
• Listing of shares• Dealings through authorized
broker
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Function of stock
exchange• Direct flow of savings
• Provides continuous market
• Easy credit facilities• Facilities sale of new securities
• Leads safety of dealings
• Proper evaluation of securities• Facilities speculation
• Storehouse of buss. Information
BENEFITS OF STOCK EXCHANGES
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TO INVESTORS TO COMPANIES TO COMMUNITY
Imparts liquidity to
securities
Good response to
new issues
Guidance to
investors
Knowledge of market prices
Enhances prestigeof the co
Investment of community’s
savings in profitablechannels
Getting loans onsecurity of listed co.
Higher prices of listed security
Helps capital
formation
Quotations haveeducative value
No threat to control Encouraged to wellmanaged co.
Safety of dealings Less fluctuation inprices
Useful to govt. incollecting hugefinances
Investments of sound co. Wide market
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Members of stock exchange jobber & his characteristics
• Dealer, specialists, stability inthe market, dealing with
brokers, jobbers profit• Equalizing quantity,
speculation, two way quotes,
matching demand & supply, cosponsorship
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Brokers & their characteristics
• Agent
• Generalist
• Conduit between jobbers &public
• Income in the form of
commission
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Listing of shares
• IPO• Size of public offer: not less than 25% of
issued capital & post issue paid up capitalis not less than Rs. 10 cr.
• Filing application : MA, AA, prospectus ,directors report , specimen copies of sharecertificates, & 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
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• 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
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Methods of trading &settlement transaction
• Selecting a broker
• Refrence for customer
• Placing an order
• Execution of order • Informing the customer
• Settlement
• Taking delivery• Reversing the transaction
• By carry over
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Each futures exchange has itsown clearing house. All
members of an exchange arerequired to clear their tradesthrough the clearing house at
the end of each trading session and to deposit with the clearinghouse a sum of money (based
on clearinghouse marginrequirements) sufficient tocover the member's debitbalance.
• For example, if a member broker reports
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p , pto the clearing house at the end of the daytotal purchase of 100,000 bushels of Maywheat and total sales of 50,000 bushels of May wheat, he would be net long 50,000bushels of May wheat.
• Assuming that this is the broker's onlyposition in futures and that the clearinghouse margin is six cents per bushel, this
would mean the broker would be requiredto have $3,000 on deposit with the clearinghouse.
• Because all members are required to
clear their trades through the clearinghouse and must maintain sufficient fundsto cover their debit balances, the clearinghouse is responsible to all members for thefulfillment of the contracts.
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• is the period for which equities are traded inExchange.
• For Indian stock exchange NSE, thecycle starts on Wednesday and endson 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 eachbroker are calculated and thebrokers then settle their respectiveobligations according to theguidelines, laws and regulationsinstitutionalized by the Clearingagency
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• is a process where by a stockbroker and Custodian (in case of Institutional deals) brings in moneyand/or securities to the ClearingHouse. This forms the first phase of the settlement activity
• is a process where Clearing
House pays money or deliverssecurities to the brokers and
Custodians. This is the second phaseof the settlement activity
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• All the above information ismostly in relation to the Indian
Stock market. Sometimes indifferent countries processesmay have some deviation fromit, but the basic fundamentals
behind the whole processremains same. In India, the Pay-in of securities and fundshappens on T+ 2 by 11 AM, and
Pay-out of securities and fundshappen on T+2 by 3 PM.
•
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Suppose if you have Rs 25000 in your tradingaccount and if your broker provides 4 times marginthen you can do day trading till Rs one lakh.
Note - Margin trading also depends on sharecategory on which trading is done.For example - “A” category shares get full marginwhile “B” category shares get less margin and thiswill go on decreasing as you move down.
Major advantage of margin amount is if you haveless money then also you can buy more shares.Some experienced traders make use of marginamount to do multiple trades taking very smallprofits.
Ti t i ti If i t th h t
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Time restrictions - If you use margin amount then you have to squareoff your trades before 3:30 pm whether your trade is in profit or lossit doesn’t matter.
We have also the information that even some trading terminalssquare off your trades automatically at 3:00 pm if you use the marginamount.
So if you use the margin amount then you have the time restrictionirrespective of whether your trade is in profit or loss you have to
square off your trade because the margin amount is not your moneyits 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 heavyplenty or some brokers charge interest rates on the margin amount.
So the bottom line is if you use the margin amount for day tradingthen you have to square off your trades irrespective whether you aremaking profit or loss.
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