About secondary markets

Secondary market refers to the network/system for the subsequent sale and purchase of securities. An investor can apply and get allotted a specified number of securities by the issuing company in the primary market. However, once allotted the securities can thereafter be sold and purchased in the secondary market only. An investor who wants to purchase the securities can buy these securities in the secondary market. The secondary market is market for subsequent sale/purchase and trading in the securities. A security emerges or  takes birth in the primary market but its subsequent movements take place in secondary market. The secondary market consists of that portion of the capital market where the previously issued securities are transacted. The firms do not obtain any new financing from secondary market. The secondary market provides the life-blood to any financial system in general, and to the capital market in particular.

The secondary market is represented by the stock exchanges in any capital market. The stock exchanges provide an organised market place for the investors to trade in the securities. This may be the most important function of stock exchanges. The stock exchange, theoretically speaking, is a perfectly competitive market, as a large number of sellers and buyers participate in it and the information regarding the securities is publicly available to all the investors. A stock exchange permits the security prices to be determined by the competitive forces. They are not set by negotiations off the floor, where one party might have a bargaining advantage.… Read the rest

About primary market or new issue market

Companies issue securities from time to time to raise funds in order to meet their financial requirements for modernisation, expansions and diversification programmes. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. The primary market refers to the set-up which helps the industry to raise the funds by issuing different types of securities. This set-up consists of the type of securities available, financial institutions and the regulatory framework. The primary market discharges the important function of transfer of savings especially of the individuals to the companies, the mutual funds, and the public sector undertakings. Individuals or other investors with surplus money invest their savings in exchange for shares, debentures and other securities. In the primary market the new issue of securities are presented in the form of public issues, right issues or private placement.

Firms that seek financing, exchange their financial liabilities, such as shares and debentures, in return for the money provided by the financial intermediaries or the investors directly. These firms then convert these funds into real capital such as plant and machinery etc. The structure of the capital market where the firms exchange their financial liabilities for long-term financing is called the primary market. The primary market has two distinguishing features :

  • It is the segment of the capital market where capital formation occurs; and
  • In order to obtain required financing, new issues of shares, debentures securities are sold in the primary market.
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Mintzberg’s Model of Organizational Structure

Management expert Henry Mintzberg  proposed that traditionally organizations (profit making or not for profit) can be divided into five components. In practice organizational structure may differ from proposed model. Factors influencing organizational structure are industry norms,  size, experience, culture, external forces (competition, inflation, minimum wage legislation etc). Components identified by Mintzberg is useful for understanding the workflow of organizations.

The structure of an organization can be defined simply as the sum total of the ways in which it divides its labor into distinct tasks and then achieves coordination among them” – The Structuring of Organizations, Henry Mintzberg.

1. Strategic Apex

Strategic  apex is the most senior level in the organization. Management working at this level is referred as board of Directors (chairman, CEO, executes and non executive directors). They set the objectives (increase sales by 10% in one year) and strategic direction (new product and markets developments) of the organization. They take major investing (takeovers) and financing (Shares issue) decisions. They are not involved in day to day operations of the business. They do not deal with customers and suppliers except in exceptional cases (dealing with complaints). They represent the organizational face to external stakeholders (person have interest in the organization like government). Integrity of organization can be judged by integrity of its board of directors.

2. Middle Line

Middle line managers interprets objectives and strategies of the strategic level management into feasible plans and standards to get the work done through operational managers. They set budget, receives reports from management accountants, monitors performances and take corrective actions where necessary.… Read the rest

An overview of Indian capital market

The changes in economic scenario(after the liberalization) and the economic growth have raised the interest of Indian as well as Foreign Institutional Investors(FII’s) in the Indian capital market. The recent massive structural reforms on the economic and industry front in the form of de-licensing rupee convertibility, tapping of foreign funds, allowing foreign investors to come to India, have resulted, on one hand, in the quantum leap in activities/volume in the Indian capital market, and on the other hand and more importantly, that the Indian capital market has undergone a metamorphosis in terms of institutions, instruments, etc. The capital market in India is rightly termed as an emerging and promising capital market. During last 20 years or so, the Indian capital market has witnessed growth in volume of funds raised as well as of.

The buoyancy in the capital market has appeared as a result of increasing industrialisation, growing awareness globalisation of the capital market, etc. Several financial institutions, financial instruments and financial services have emerged as a result of economic liberalisation policy of the Government of India.

The capital market has two interdependent segments : the primary market and the secondary market. The primary market is the channel for creation of new securities. These securities are issued by public limited companies or by government agencies’ In the primary market, the resources are mobilized either through the public issue or through private placement route. It is a public issue if anybody and everybody can subscribe for it, whereas if the issue is made available to a selected group of persons it is termed as private placement.… Read the rest

Difference between money market and capital market

Difference and demarcation between money market and capital market is made on the basis of maturity period of instruments and claims. short-term instruments maturing within a period of one year are traded in money market whereas the capital market deals with longer maturity financial assets and claims. Though both types of markets facilitate the transfer of funds from savers to deficit-users, still the difference between the two is maintained with reference to the time-period covered by the transactions. Capital market includes trading in securities, mutual fund units and government debt instruments. On the other hand’ money market facilitates dealings in short-term financial instruments such as inter-corporate deposits, certificate of deposits, treasury bonds, commercial papers, commercial bills, etc. Money market and capital market can be differentiated as follows :

  • The subject matter of capital market is long-term financial instruments having maturity of more than one year. on the other hand, the thrust of MM is on short-term instruments only.
  • Money market is a wholesale market and the participants in money market are large institutional investors, commercial banks, mutual funds, and corporate bodies. However, in case of capital market even a small individual investor can deal by sale/purchase of shares, debentures or mutual fund units.
  • In capital market, the two common segments are primary market and secondary market. Both these segments are interrelated. Securities emerge in primary segment and their subsequent dealings take place in secondary market. However, in case of money market, there is no such sub-division in general. In efficient money market, secondary market transactions may also take place.
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Major participants and players in financial markets

In the financial markets, there is a flow of funds from one group of parties (funds-surplus units) known as investors to another group (funds-deficit units) which require funds. However, often these groups do not have direct link. The link is provided by market intermediaries such as brokers, mutual funds, leasing and finance companies, etc. In all, there is a very large number of players and participants in the financial market. These can be grouped as follows :

The individuals: These are net savers and purchase the securities issued by corporates. Individuals provide funds by subscribing to these security or by making other investments.

The Firms or corporates: The corporates are net borrowers. They require funds for different projects from time to time. They offer different types of securities to suit the risk preferences of investors’ Sometimes, the corporates invest excess funds, as individuals do. The funds raised by issue of securities are invested in real assets like plant and machinery. The income generated by these real assets is distributed as interest or dividends to the investors who own the securities.

Government: Government may borrow funds to take care of the budget deficit or as a measure of controlling the liquidity, etc. Government may require funds for long terms (which are raised by issue of Government loans) or for short-terms (for maintaining liquidity) in the money market. Government makes initial investments in public sector enterprises by subscribing to the shares, however, these investments (shares) may be sold to public through the process of disinvestments.… Read the rest