Understanding Financial Markets
1. What
are the various types of financial markets?
The financial markets can broadly be
divided into money and capital market.
Money Market:
- Money
market is a market for debt
securities that pay off in the short term usually less than one year, for example
the market for 90-days treasury bills.
- This
market encompasses the trading and issuance of short
term non equity debt instruments including treasury bills, commercial papers, bankers
acceptance, certificates of deposits, etc.
Capital Market:
- Capital
market is a market for long-term debt and equity shares.
- In
this market, the capital funds comprising of both equity and debt are
issued and traded.
- This
also includes private placement sources of debt and equity as well as
organized markets like stock exchanges.
- Capital
market can be further divided into primary and secondary markets.
2. What is meant by
Secondary Market?
- Secondary
Market refers to a market where securities are traded after being
initially offered to the public in the primary market and/or listed on the
Stock Exchange. .
- Majority of the trading is done in the secondary
market.
- Secondary market comprises of equity markets and the debt
markets.
For the general investor, the secondary
market provides an efficient platform for trading of his securities. For the
management of the company, Secondary equity markets serve as a monitoring and
control conduit—by facilitating value-enhancing control activities, enabling
implementation of incentive-based management contracts, and aggregating
information (via price discovery) that guides management decisions.
3. What
is the difference between the primary market and the secondary market?
- In
the primary market, securities are offered to public for subscription for
the purpose of raising capital or fund.
- Secondary
market is an equity trading avenue in which already existing/pre- issued
securities are traded amongst investors. Secondary market could be either
auction or dealer market.
- While
stock exchange is the part of an auction market, Over-the-Counter (OTC) is
a part of the dealer market.
SEBI and its Role in the Secondary Market
4. What is SEBI and
what is its role?
The SEBI is the regulatory authority
established under Section 3 of SEBI Act 1992 to protect the interests of the
investors in securities and to promote the development of, and to regulate, the
securities market and for matters connected therewith and incidental thereto.
5. What
are the various departments of SEBI regulating trading in the secondary market?
The following departments of SEBI take
care of the activities in the secondary market.
|
Sr.No.
|
Name of the Department
|
Major Activities
|
|
1.
|
Market Intermediaries Registration and
Supervision department (MIRSD)
|
Registration, supervision, compliance monitoring and
inspections of all market intermediaries in respect of all segments of the
markets viz. equity, equity derivatives, debt and debt related
derivatives.
|
|
2.
|
Market Regulation Department (MRD)
|
Formulating new policies and supervising the
functioning and operations (except relating to derivatives) of securities
exchanges, their subsidiaries, and market institutions such as Clearing and
settlement organizations and Depositories (Collectively referred to as
‘Market SROs’.)
|
|
3.
|
Derivatives and New Products
Departments (DNPD)
|
Supervising trading at derivatives segments of stock
exchanges, introducing new products to be traded, and consequent policy
changes
|
Products available in the Secondary Market
6. What are the
products dealt in the secondary markets?
Following are the main financial
products/instruments dealt in the secondary market:
Equity: The ownership interest in a
company of holders of its common and preferred stock. The various kinds of
equity shares are as follows:-
Equity Shares:
An equity share, commonly referred to as
ordinary share also represents the form of fractional ownership in which a
shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk
associated with a business venture. The holders of such shares are members of
the company and have voting rights.
- Rights
Issue / Rights Shares: The issue of new securities to existing
shareholders at a ratio to those already held.
- Bonus
Shares: Shares
issued by the companies to their shareholders free of cost by capitalization of
accumulated reserves from the profits earned in the earlier years.
- Preferred
Stock / Preference shares: Owners of these kinds of shares are
entitled to a fixed dividend or dividend calculated at a fixed rate to be
paid regularly before dividend can be paid in respect of equity share.
They also enjoy priority over the equity shareholders in payment of
surplus. But in the event of liquidation, their claims rank below the
claims of the company’s creditors, bondholders / debenture holders.
- Cumulative
Preference Shares: A type of preference shares on which
dividend accumulates if remains unpaid. All arrears of
preference dividend have to be paid out before paying dividend on equity
shares.
- Cumulative
Convertible Preference Shares: A type of preference shares where the dividend
payable on the same accumulates, if not paid. After a specified
date, these shares will be converted into equity capital of the company.
- Participating Preference Share: The right of certain
preference shareholders to participate in profits after a specified fixed
dividend contracted for is paid. Participation right is linked
with the quantum of dividend paid on the equity shares over and above a
particular specified level.
- Security Receipts: Security receipt means a receipt or other
security, issued by a securitisation company or reconstruction company to
any qualified institutional buyer pursuant to a scheme, evidencing the
purchase or acquisition by the holder thereof, of an undivided right,
title or interest in the financial asset involved in securitisation.
- Government
securities (G-Secs): These are sovereign (credit risk-free) coupon
bearing instruments which are issued by the Reserve Bank
of India on behalf of Government of India, in lieu of the
Central Government's market borrowing programme. These securities have a
fixed coupon that is paid on specific dates on half-yearly basis. These
securities are available in wide range of maturity dates, from short dated
(less than one year) to long dated (up to twenty years).
- Debentures: Bonds issued
by a company bearing a fixed rate of interest usually payable
half yearly on
specific dates and principal amount repayable on particular date on
redemption of the debentures. Debentures are normally
secured / charged against the asset of the company in favour of debenture holder.
- Bond: A negotiable
certificate evidencing indebtedness. It is normally
unsecured. A
debt security is generally issued by a company, municipality or
government agency. A bond investor lends money to the issuer and
in exchange, the issuer promises to repay the loan amount on a specified
maturity date. The issuer usually pays the bond holder periodic interest
payments over the life of the loan. The various types of Bonds are as
follows-
Ø Zero Coupon Bond: Bond issued at a discount and repaid at a
face value. No
periodic interest is paid. The difference between the issue price and
redemption price represents the return to the holder. The buyer of these bonds
receives only one payment, at the maturity of the bond.
Ø Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.
- Commercial
Paper: A short
term promise to repay a fixed amount that is placed on the market either
directly or through a specialized intermediary. It is usually
issued by companies with a high credit standing in the form of a
promissory note redeemable at par to the holder on maturity and therefore,
doesn’t require any guarantee. Commercial paper is a money market
instrument issued normally for tenure of 90 days.
- Treasury
Bills: Short-term
(up to 91 days) bearer discount security issued by the
Government as a means of financing its cash requirements.