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Financial System
Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Flow of funds (savings)
Seekers of funds (Mainly business firms and government) Suppliers of funds (Mainly households) Flow of financial services
Contribution to GNP
Creation of Employment Opportunities
Classification
CAPITAL MARKET: Term Lending Institutions Investing Institutions Long Term Funds MONEY MARKET: Consists of Commercial banks Co-operative banks and other agencies Short term funds
Money Market
The market for dealing with financial assets and sec. which have a maturity period of up to one year.
RBI defines the money market as A market for short term financial assets that are close substitutes for money, facilitates the exchange of money for new financial claims in primary market as also for financial claims, already issued, in the secondary market
To enable the central bank to influence and regulate liquidity in the economy through its intervention in this market.
To provide reasonable access to the users of short-term funds to meet requirements.
Call money market Commercial bills market Acceptance market Treasury bill market
Advantages of call money market: High liquidity High profitability Maintenance of statutory reserve ration (SRR) Safe and cheap Assistance to central bank operation
Types of bills
Demand bills
are also called sight bills. these bills are payable immediately as soon as they are presented to the drawer no time of payment is specified and hence they are payable at sight.
Documentary bill
when bills have to be accompanied by document of title to goods like railway receipt, lorry receipt, bill of lading etc.The bills are called documentary bills.
Inland and foreign bills Inland bills are those drawn upon a person resident in India and are payable in India. foreign bills are drawn outside India and they may be payable either in India or outside India. Export bills and import bills Export bills are those drawn by Indian exporters on imports outside India and importer bills are drawn on Indian importers in India by exporters outside India. Indigenous bills Indigenous bills are those drawn and accepted according to native custom or usage of trade.
Importance of TB
Safety Liquidity Ideal short-term investment Ideal fund management Statutory liquidity Source of sort term funds Non-inflationary monetary tool Hedging facility Defects of TB poor yield absence of competitive bids absence of active trading
Certificate of deposit CD are short term deposits instruments issued by bank and financial institutions t raise large sums of money. Repo instrument. Repurchase transaction the borrower parts with securities to the lender with an agreement to repurchase them at the end of the fixed period at a specified price.
At the end of the period the borrower will repurchase the securities at the predetermined price.
Capital Markets
What is Capital Market It is an organized market mechanism for effective and efficient transfer of money capital or financial resources from the investing class to the entrepreneur class in the private and public sector of the economy. Capital market for long term funds. The capital market provides long term debt and equity finance for govt. and corporate.
Middlemen
Capital Market
Stock exchange New issue market Finance and investment corp.
Bank Deposits Deposits with Companies Loans and advances of banks and FIs. POC and deposits
Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares are tradable through a private broker 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
One time activity by the company.
Helps in mobilizing the funds for the investors in the short run.
MORDERN ACTIVITIES:
Definition:
Security Trading
Trading is the process of buying and selling securities. The procedure of trading consists of two processes, i.e. Delivery (when securities are sold) and Receipt (when securities are purchased). These two processes can be understood as follows:
Basics of Offline trading: Call or visit the broking firm and trade. Transfer funds online as well as via cheque. Shares can be transferred online if account is with same broker else can deliver manually too. Trading limits can be flexible depending on the relationship with the broker. Cant view real time quotes, would have to depend on the dealer. Tele-confirmation of trades. Contract notes can be viewed online as well as can be received offline via courier. Accounts, balances, portfolio etc can be viewed online as well as on request can be received via courier. Higher brokerage/commission costs.
In online trading you are trading on the real time. No phone calls and no wait time, you can directly sell or buy stocks in about no time and get the stocks at the price that are showing on your screen.
There is no middle man involved in online trading. You need not have a broker to execute your calls, you can do the selling or buying of the stocks yourself. In case of online stock trading there is no paper work involved, all your stocks are stored at your demat account and you can see them online. Disadvantages Of Online Trading The biggest disadvantage of online trading is that you must be online to place your bid and trade in stocks. When you are on move and you get a call for a potentially profitable stock you can not buy that stock at that moment itself. For those who are otherwise busy all the time it is difficult to manage their portfolio by their own. So, online trading is hardly of any help for them. Not all the exchanges are online till date, so the online trading options are still limited.
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Disadvantage Of Offline Trading Often times the brokers takes time to execute your instruction for selling or buying the stocks that might incur losses. Offline trading brokerage is always higher than that of online brokerage
Rematerialisation (Remat)
Rematerialisation is the process of conversion of securities from electronic form to physical form. Your DP will forward your request to NSDL, after verifying that you have the necessary balance. NSDL in turn will intimate the registrar who will print the certificates and dispatch the same to you.
Depositories
A Depository is an organization, which holds the beneficial owners securities in electronic form, through a registered Depository Participant (DP). To avail of the services offered by a depository, the investor has to open a DP account with a registered Depository Participant. In other words, a Depository is like a Bank where securities are held in electronic (demat) form, which enables securities transactions to be processed by book entry as electronic records. In India, there are two Depositories:1. NSDL (National Securities Depositories Limited) 2. CDSL (Central Depository Services Limited).
Depository
Definition: A Depository is an organization, which holds the beneficial owners securities in electronic form, through a registered Depository Participant (DP). To avail of the services offered by a depository, the investor has to open a DP account with a registered Depository Participant. In other words, a Depository is like a Bank where securities are held in electronic (demat) form, which enables securities transactions to be processed by book entry as electronic records. In India, there are two Depositories:1. NSDL (National Securities Depositories Limited) 2. CDSL (Central Depository Services Limited). Beneficial Owner (BO) Beneficial Owner is a person in whose name a demat account is opened with any of the two depositories for the purpose of holding securities in the electronic form and whose name is recorded as such with that depository.
Depository Participant(DP) Under the Depositories Act, investors can avail of the services of the Depositories through Depository Participants. A Depository Participant (DP) is an agent of the depository who is authorized to offer depository services to investors. Financial Institutions, Banks, Custodians and Stockbrokers complying with the requirements prescribed by SEBI / Depositories can be registered as DP. For selling Dematerialised securities After selling the securities, the Beneficial Owner should instruct his DP whom he maintains his demat account, through the Delivery Instruction Slip (DIS), to debit his account with the number of securities sold by him and credit his brokers (clearing member pool )account. Then the broker gives instruction to its DP for delivery to clearing corporation before the pay-in day. After that, the broker receives payment from the stock exchange (clearing corporation). And finally the seller receives payment from the sale of securities from the broker.
On-market transactions Any transaction for sale and purchase of securities through a broker on the stock exchange to be settled through clearing corporation is generally called as On-market transaction.
Off-market transactions When securities are transferred from the beneficiary account of one investor to that of another, and if that transaction does not get round through the stock exchange, it is an off-market transaction. Inter Depository transfer Any transfer of securities between two Beneficial Owners not having demat accounts with the same depository is called as Inter Depository transfer.
Change of name, address, registration of power of attorney etc, recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately.
Facility to hold equity, debt instruments and Government securities in a single account. Automatic credit into demat account, of shares, arising out of split/consolidation/merger etc.
Establishment of RBI
The reserve bank of India was established on April 1,1935 in accordance with the provisions of the reserve bank of India Act, 1934.
Objectives of RBI
To maintain the internal value of the nations currency. To preserve the external value of the currency. To secure reasonable price stability.
To promote economic growth with rising levels of employment, out and real income
Functions of a RBI
Monetary policy functions Currency issue and management Maintaining value of currency Anchor economic growth expectation Monetary regulation and management Regulation of interest rates Financial sector regulation and supervision Exchange management and control Credit control Liquidity management Clearing and settlement Development of financial market Policy oriented research Collection of data and publication of reports Institution building
Deposit insurance
Training and banking education