Ina an economy some agents have surplus funds while others have deficient funds. The market where the exchange of funds between those who need and those who have in surplus takes place is called Financial Market
Financial Institutions
- Banks
- Mutual Funds
- Insurance
- Pensions
- Post Office
- Share Market
Financial Market
- Money Market - short term loans upto 12 months
- Capital Market - long term investments
- Debt or Bond Market - giving loans in return for fixed return
- Equity Market - buying shares in return for dividends or share appreciation
- Primary Market
- Secondary Market
Debt or Bond Market
- Investments through bond purchase by investor/lender/creditor
- When bond reaches maturity the investor redeems bond value + promised interest / dividend
- So profit or loss doesn't affect the return for investors
- Bonds are secured against collateral
- No ownership rights for investors
- During liquidation bonds are given priority over equity
- Types
- Zero coupon bonds - Instead of interest, bonds are purchased at a discount and redeemed at issue price
- Inflation indexed Bonds = Interest promised + inflation || bcos ( Real Interest Rate = Interest Rate + Inflation )
- Convertible Bonds
- Fully Convertible - Whole loan amount can be converted into equity
- Partially Convertible - Only partial loan amount can be converted into equity
- Non-Convertible - No part of loan can be converted into shares
- Short-term Bonds (maturity less than 1 year)
- Govt - issues Treasury Bills (for long term loans of 20-30 years G-Secs are issued)
- Companies - issues Commercial Papers
- Banks - issues Certificate of Deposits
- 14 days, 91 days, 182 days, 364 days
Some terms
- Bond price = Cost of the bond
- Bond Yield = Interest rate on bond
- Debentures = Debt Instrument without collateral
- External Commercial Borrowing = Debt instrument to raise loans from foreign investors
Equity Market
- Investment through buying shares
- Investors earn or loose by trading the share to another investor when the share price goes up or down respectively
- Investors also earn through dividends released from the profits
- So profit or loss affects returns
- Investors owns a part of the company based on no of shares they have
- So there is no security against the the share purchased
- Types
- Primary Market
- IPO - Initial Public Offering - Initial or 1st time sale of shares to public - Underwriter who is an investment bank or investment banks buys the IPO shares before listing and sells it stock exchange
- FPO - Follow-on Public Offering - Second or follow up share listing to raise capital by listed company after IPO
- Private Placement - Sale of shares directly to big investors like banks or HNI without
- Secondary Market
- Stock Exchange - where existing shares are traded
- Commodities Exchange - Where food products, metal and energy is traded
- MCX - Multi-commodity Exchange
- NCDEX - National Commodity and Derivatives Exchange
- Derivative Market - Financial instrument that derives its value from an underlying asset or group of assets like stocks, bonds, commodities, currencies, interest rates, market indices
- Future - obliged to buy or sell at future date at fixed price
- Option - option to buy or sell at future data at fixed price
- Forward Market - Future traded outside exchanges
- Primary Market
Some more terms
- Funds of stock exchange
- Domestic Funds
- Mutual Funds - can include both equity and bonds
- Open Ended - can be bought at any time
- Close Ended - can be bought or sold only in secondary market after closing date of issue
- Exchange traded fund - mutual funds that tracks price of stock, gold ..etc
- Gold ETF - tracks only gold(govt wants to popularise this to reduce CAD)
- Pension Funds
- Insurance Funds
- Company's Investment
- Bank Investment
- Mutual Funds - can include both equity and bonds
- Foreign Funds
- Foreign Institutional Investors
- Participatory Notes or P-Notes
- Hedge Funds
- Domestic Funds
- Gild edge securities = Govt securities
- Alternative Investment Funds
- Privately pooled investment funds that doesn't come under jurisdiction of any regulatory agency in India
- Includes venture funds, hedge funds, private equity funds, debt funds, infrastructure funds
- Free floating market Capital = price of each share * no of shares of a company
- SENSEX = Sensitive Index is weighted avg of FFMC of top 30 Companies listed in Bombay Stock Exchange
- NIFTY = National Index fifty is weighted avg of FFMC of 50 most liquid or actively traded stocks in National Stock Exchange
Rising Fund in Foreign Capital Market
- American Depository Receipt - Indian companies can list themselves in american stock exchange
- Global Depository Receipt - Indian companies can list themselves in European stock exchange
- Indian Depository Receipt - Foreign companies can enlist in Indian stock exchange