Savings: The income of a person may be used for purchasing goods and services that he currently requires or it may be saved for meeting future requirements. Savings are generated when a person or an organisation abstains from present consumption for a future use.
The Central Statistical Organisation (CSO) defines saving as “ the excess of current income over current expenditure and is the balancing item on the income outlay accounts of producing enterprises, households, government administration and other final consumers’. For the purpose of estimating the domestic savings, the economy has been divided into three broad institutional sectors: such as households, private corporate and public sector.
Factors affecting savings : In order to promote economic development, savings is not only to be generated but also to be mobilized to the maximum extent possible and then channelize them into productive investment. The main factors that determine the size of savings are:
- Size of income
- The fiscal and monetary policy of the government. (Monetary policy concerned with the management of the supply, cost and availability of money. Fiscal policy is a package of economic measures of the government regarding its public expenditure, public revenue and public borrowing.)
- Subjective factors like need for meeting unforeseen contingencies, meet expected future needs, meet speculative or business purposes, need to accumulate wealth etc.
- Rate of interest prevailing in the economy
- Price level changes (Inflation )
- Spending habit of people
- Demonstration effect (desire to imitate the superior consumption standards of the advanced countries.
Financial Market: A market is a place used for buying and selling goods. The economic units in an economy such as individuals in the house hold sector, business units in the industrial and commercial sector and government organizations and departments engaged in various economic activities and transactions involving money. Some are in financial deficit and some others are in financial surplus. The transfer of funds from surplus generators to deficit generators is essential for economic development.
The market facilitate such an exchange or transfer is called financial market. the commodity exchanged in this market is a financial asset instead of physical asset. When the financial assets transferred are corporate securities and government securities, the mechanism of transfer is called securities market.
Money Market and Capital Market: On the basis of the maturity period of securities traded in the securities market, the market is segmented into money market and capital market. Money market is the market for short- term financial assets with maturities of one year or less. Treasury bills, commercial bills, commercial paper, certificated of deposits, etc are the short term securities traded in the money market.
Capital market is the market where securities with maturities of more than one year are bought and sold. Equity shares, preference shares, debentures and bonds are the long term securities traded in the capital market
Primary Market and Secondary Market: Depending on the nature and type of securities traded, financial market may be classified as primary market and secondary market. The market mechanism for buying and selling of new issues of securities is known as primary market. This market is also termed as new issues market.
The Secondary market deals with securities which have already been issued and are owned by investors. These may be traded between investors. The buying and selling of securities already issued and outstanding take place in stock exchanges. Hence stock exchanges constitute the secondary market.
Methods of floating New Issues
The methods by which new issues of shares are floated in the primary market in India are:
Public issue – Sale of securities to members of the public directly by a company. The company makes an offer for a sale of a fixed number of shares at a particular price through a legal document called prospectus.
Rights Issue – As per section 81 of the Companies Act, 1956, when a company issues additional equity capital it has to be offered first to the existing shareholders on a pro-rata basis. Such an issue of securities to the existing share holders in proportion to their current holding is called rights issue.
Private Placement – Private placement is a sale of securities privately by a company to a selected group of investors. The securities are normally placed with the institutional investors, mutual funds or other financial institutions.
Stock Exchange – Definition
A stock exchange may be defined as, “a centralised market for buying and selling stocks where the price is determined through supply- demand mechanism”.
According to the Securities Contracts (Regulation) Act 1956, “Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities”.
Role and functions of a Stock Exchange: A stock exchange has an important role to fulfill the economic development of a country. The stock exchange performs certain essential functions in the process of capital formation and in raising resources for the corporate sector. Some of them are:
- Established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities.
- Provides a market for the trading of securities to individuals and organisations seeking to invest their savings or excess funds through the purchase of securities.
- Provides a physical location for buying and selling securities that have been listed for trading on that exchange.
- Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules.
- The exchange itself does not buy or sell the securities, nor does it set prices for them. It assures that no investor will have an undue advantage over the other market participants.
Characteristics of Stock Exchange: The essential features or characteristics of stock exchange are:
- It is a voluntary association registered by certain laws.
- Control of the exchange performed by governing body, which was elected by the members of exchange.
- The members should obey the rules and regulations
- Only securities enlisted in the official list of stock exchange can be transacted through stock exchange.
Stock broking: Stock broking is the professional activity of buying and selling stocks and shares for clients. A transaction on a stock exchange must be made between two members of the exchange. Such an exchange must be done through a broker. “There are 3 types of stock broking services:
- Pertaining to only execution, which means the broker will only carryout the client’s instruction to buy or sell
- Concerned with the advisory dealing, where the broker advises the client on which shares to buy and sell, but leaves the final decision to the investor.
- Discretionary dealings, where the stock broker ascertains the clients’s investment objectives and then makes all dealing decisions on behalf of his client.
Difference between Primary market and Secondary Market
In 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 issued securities are traded among investors. Secondary market could be either auction or dealer market. Stock Exchange is the part of an auction market and over the Counter market as part of the dealer market.
NASDAQ- NASDAQ is an American Stock Exchange. It originally stood for ‘National Association of Securities Dealers Automated Quotations’. It is the largest electronic screen-based equity securities trading market in the US and fourth largest by market capitalization in the world.
No comments:
Post a Comment