Financial institutions and market

Answer1

Securities market can be defined as the market, whereby financial instruments, obligations, and
claims are available for sale. It is classified into two interdependent segments, i.e. Primary
Market and Secondary Market. The former is a market where securities are offered for the
first time for receiving public subscription while the latter is a place where pre-issued securities
are dealt between the investors. While primary market offers avenues for selling new securities
to the investors, the secondary market is the market dealing in securities that are already issued
by the company. Before investing your hard-earned money in financial assets like shares,
debenture, commodities etc, one should know the difference between primary market and
secondary market, to have better utilization of savings.

Main para

Primary market

The primary market plays an important role in the securities market by forming a link between
the savings and investments. It is through this market that the borrower’s viz., the Government
and the corporate issue securities in which the investors deploy their savings. The primary
market comprises, the public issues and the private placement market. A public issue consists of
a company entering the market to raise funds from all types of investors; its debut is known as
the initial public offer (IPO). In case of private placement, there are only a few select subscribers
to the issue. The securities can be issued at a face value, or at a discount/premium; they may take
a variety of forms such as equity, debt or some hybrid instrument.

Features of primary markets are:

1. This is the market for new long term equity capital. The primary market is the
market where the securities are sold for the first time. Therefore it is also called the new
issue market (NIM).

2. In a primary issue, the securities are issued by the company directly to investors.

3. The company receives the money and issues new security certificates to the investors.

4. Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.

5. The primary market performs the crucial function of facilitating capital formation in the
economy.
 6. The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may
be raising capital for converting private capital into public capital; this is known
as "going public."

7. The financial assets sold can only be redeemed by the original holder.

Following are the methods of raising capital in the primary market:

(i) Public Issue: Under this method, the company issues a prospectus and invites the
general public to purchase shares or debentures.

(ii) Offer for Sale: Under this method, firstly the new securities are offered to an
intermediary (generally firms of stock brokers) at a fixed price. They further resell the
same to the general public. The advantage of doing this is that the issuing company
feels free from the tedious work of making a public issue.

(iii) Private Placement: Under this method, the company sells securities to the institutional
investors or brokers instead of selling them to the general public. They, in turn, sell
these securities to the selected clients at a higher price. This method is preferred as it
is a cheaper method of raising funds as compared to a public issue.

(iv) Right Issue: This method is used by those companies who have already issued their
shares. When an existing company issues new shares, first of all it invites its existing
shareholders. This issue is called the right issue. In this case, the shareholder has the
right either to accept the offer for himself or assign a part or all of his right in favour
of another person.

(v) (v) Electronic Initial Public Issue (e-IPOs):Under this method, companies issue their
securities through the electronic medium (i.e.internet). The company issuing
securities through this medium enters into a contract with aStock Exchange.

Secondary market:

Secondary market refers 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 trading is done in
the secondary market.

Role of secondary market

Platform for trading of securities for companies its serves for monitoring and controlling
activities. Secondary market comprises of
y

Equity Markets It refers to equity shares traded in stock market

The Debts Market It represents borrowing which has predetermined terms and conditions
,rate of interest, repayment of principal amount by borrower to lender. In the Indian.Theinvestors
in debt market are banks, financial institutions, mutual funds.Debt instruments terminology :-

Maturity of a bond refers to a date on which the bond matures-

Coupon refers to the periodic interest payments that are made by the issuer of the bond tothe
subscriber of the bond.-

Principal refers the amount that has been borrowed and its also called the par value and theface
value of the bond.Segments in debt market-

Govt securities e.g NSC, KVP, NSS-

Public sector unit bonds e.g FD with NTPC, BHEL,

EC, PPF with SBI-

Corporate securities e.g Term deposits with L & T, Tata motors.Stock exchange:Most stocks
are traded on exchanges, which are places where buyers and sellers meet and decide on
aprice. Exchanges are physical locations, where transactions are carried out on a trading floor.
The otherkind of exchange is virtual kind, composed of a network computers where trades are
made electronicallywhich is widely used everywhere now.Exchange:

Stock Exchange (BSE, NSE and other local exchanges)

Commodities Exchange (MCX, NCDEX, etc)