A financial system is a set of institutional arrangements, through which financial surpluses are mobilized from the units generating surplus income to others in need of them.
Financial markets , financial assets, financial services and financial institutions constitutes the financial system
Financial market provide channels for allocation of savings to investment, that is how the savings are channelised into investments thus generating further income, cash or assets.
Financial market has two major components viz. money market and capital market
Money market refers to the market where borrowers and lenders exchange short-term funds, to solve their liquidity needs.
Money market instruments have low default risk, maturities under one year and high marketability (liquidity).
Low default risk implies that generally the risk of non payment of money is low.
Maturities under one year implies that all contracts are of maximum one year.
Capital market is wider that securities market and embraces all form of lending and borrowing. It comprises of institutions and mechanisms through which medium to long term funds are pooled and made available to business, government and individuals.
Securities market refers to the markets for those financial instruments/claims/obligations that are commonly and readily transferable by sale.
This implies that the title to ownership is with the holder; whosoever holds the securities is deemed to be the owner of the securities, unless proved otherwise. These do not contain the name of the holder and hence are transferable by sale.
Securities market consists of primary market and secondary market.
Primary market consists of channel for sale of new securities, while secondary market deals in the securities already issued.
Primary markets involve the following methods of issue.
Ø IPO
Ø Further issue of capital
Ø Rights issue
Ø Offers to public
Ø Bonus issue
Secondary market enables those who already hold securities to adjust their investment in response to change in their assessment of risk and return, the statement implies that those who already holds the securities may want to sell them in case if those securities are not paying off, or if he needs to adjust his liquidity or for any other reason. Secondary market refers to the stock exchanges, a stock exchange provides mechanism to buy and sell the securities already issues in primary market.
There are at present 23 stock exchanges in India
Participants in the securities market are
Ø Issuers of securities
Ø Investors in securities
Ø Intermediaries- brokers, sub brokers, merchant bankers, underwriters etc.
Ø Regulators
capital market instruments can be categorized into 3 categories
1. pure instruments
2. hybrid instruments
3. derivatives
There are basically 3 classes of instruments
1. equity shares
2. preference shares
3. debentures/bonds
A pure instrument contains the basic characteristics of one class of instrument only
A hybrid instrument contains the basic characteristics of more than one class of instrument.
A derivative is in the form of futures and options
Basic characteristics of equity shares (the list is not exhaustive)
Ø Voting rights at all general meetings of company
Ø Right to share the profits of the company in the form of dividend and bonus shares
Ø Right to pre-emption in the matter of fresh issue of capital; also called right issue
Basic characteristics of preferences shares (the list is not exhaustive)
Ø Preference in payment of dividend
Ø Preference in repayment of capital
Ø Voting rights in case of non-payment only
Basic characteristics of debentures/bonds (the list is not exhaustive)
Ø Issued by the company as a certificate of indebtness
Ø Indicates the date of redemption
Ø Indicates the rate of interest and the date of payment
Ø May or may not create a charge on assets of the company
Any instrument which contains the basic characteristics of only one class is termed as Pure instrument,
Hybrid instruments contains characteristics of more than one class only, these includes
Ø Convertible preference shares
Ø Cumulative preference shares
Ø Non-convertible debentures with equity warrants
Ø Partly convertible debentures
Ø Partly convertible debentures with khokha (buy-back arrangement)
Ø Secured premium note with warrants
Cumulative preference shares: the dividend payable on preference shares very year becomes a first claim, in case the company does not have adequate profit, or for some reasons company does not want to pay dividend then the dividend payable on preference shears gets accumulated for being paid subsequently
For example a company issues 10,000 cumulative preferences shares of Rs. 100 each
The rate of dividend is 10%, and then every year company has to pay Rs. 1, 00,000. in case company fails to pay the dividend then next year it would have to pay the dividend Rs. 2,00,000 and so on, As the case may be
Non- Cumulative preference shares: in case of non- Cumulative preference shares dividend do not get accumulated, and if company do not pays the dividend in one year, then it has no liability towards payment of that dividend next year.
Convertible preference shares: these are convertible into equity shares at the end of a specified period at the option of investor or shareholder.
Types of debentures
1. Naked or unsecured debentures: these do not create any charge on the assets of company thus these are unsecured debentures.
2. Secured debentures: these are secured by mortgage of the whole or part of assets of company
3. Redeemable debentures: these debentures are redeemable at the end of specified period, that is company intends to repay the debentures after a specified period of time
4. Perpetual debentures: those which are redeemable on happening of a specified event which may or may not occur. For example a company may issue debentures redeemable on expiry of next cricket world cup.
5. Fully convertible debentures: these debentures are fully convertible into equity or preference shares at the end of specified period, at the option of debentureholder
6. Partially convertible debentures: these debentures contain two parts, one which company will repay after a specified period of time and other which is convertible into equity or preference shares of company at the end of specified period.
7. Non-convertible debentures: these debentures are not convertible into equity or preference shares
Financial markets , financial assets, financial services and financial institutions constitutes the financial system
Financial market provide channels for allocation of savings to investment, that is how the savings are channelised into investments thus generating further income, cash or assets.
Financial market has two major components viz. money market and capital market
Money market refers to the market where borrowers and lenders exchange short-term funds, to solve their liquidity needs.
Money market instruments have low default risk, maturities under one year and high marketability (liquidity).
Low default risk implies that generally the risk of non payment of money is low.
Maturities under one year implies that all contracts are of maximum one year.
Capital market is wider that securities market and embraces all form of lending and borrowing. It comprises of institutions and mechanisms through which medium to long term funds are pooled and made available to business, government and individuals.
Securities market refers to the markets for those financial instruments/claims/obligations that are commonly and readily transferable by sale.
This implies that the title to ownership is with the holder; whosoever holds the securities is deemed to be the owner of the securities, unless proved otherwise. These do not contain the name of the holder and hence are transferable by sale.
Securities market consists of primary market and secondary market.
Primary market consists of channel for sale of new securities, while secondary market deals in the securities already issued.
Primary markets involve the following methods of issue.
Ø IPO
Ø Further issue of capital
Ø Rights issue
Ø Offers to public
Ø Bonus issue
Secondary market enables those who already hold securities to adjust their investment in response to change in their assessment of risk and return, the statement implies that those who already holds the securities may want to sell them in case if those securities are not paying off, or if he needs to adjust his liquidity or for any other reason. Secondary market refers to the stock exchanges, a stock exchange provides mechanism to buy and sell the securities already issues in primary market.
There are at present 23 stock exchanges in India
Participants in the securities market are
Ø Issuers of securities
Ø Investors in securities
Ø Intermediaries- brokers, sub brokers, merchant bankers, underwriters etc.
Ø Regulators
capital market instruments can be categorized into 3 categories
1. pure instruments
2. hybrid instruments
3. derivatives
There are basically 3 classes of instruments
1. equity shares
2. preference shares
3. debentures/bonds
A pure instrument contains the basic characteristics of one class of instrument only
A hybrid instrument contains the basic characteristics of more than one class of instrument.
A derivative is in the form of futures and options
Basic characteristics of equity shares (the list is not exhaustive)
Ø Voting rights at all general meetings of company
Ø Right to share the profits of the company in the form of dividend and bonus shares
Ø Right to pre-emption in the matter of fresh issue of capital; also called right issue
Basic characteristics of preferences shares (the list is not exhaustive)
Ø Preference in payment of dividend
Ø Preference in repayment of capital
Ø Voting rights in case of non-payment only
Basic characteristics of debentures/bonds (the list is not exhaustive)
Ø Issued by the company as a certificate of indebtness
Ø Indicates the date of redemption
Ø Indicates the rate of interest and the date of payment
Ø May or may not create a charge on assets of the company
Any instrument which contains the basic characteristics of only one class is termed as Pure instrument,
Hybrid instruments contains characteristics of more than one class only, these includes
Ø Convertible preference shares
Ø Cumulative preference shares
Ø Non-convertible debentures with equity warrants
Ø Partly convertible debentures
Ø Partly convertible debentures with khokha (buy-back arrangement)
Ø Secured premium note with warrants
Cumulative preference shares: the dividend payable on preference shares very year becomes a first claim, in case the company does not have adequate profit, or for some reasons company does not want to pay dividend then the dividend payable on preference shears gets accumulated for being paid subsequently
For example a company issues 10,000 cumulative preferences shares of Rs. 100 each
The rate of dividend is 10%, and then every year company has to pay Rs. 1, 00,000. in case company fails to pay the dividend then next year it would have to pay the dividend Rs. 2,00,000 and so on, As the case may be
Non- Cumulative preference shares: in case of non- Cumulative preference shares dividend do not get accumulated, and if company do not pays the dividend in one year, then it has no liability towards payment of that dividend next year.
Convertible preference shares: these are convertible into equity shares at the end of a specified period at the option of investor or shareholder.
Types of debentures
1. Naked or unsecured debentures: these do not create any charge on the assets of company thus these are unsecured debentures.
2. Secured debentures: these are secured by mortgage of the whole or part of assets of company
3. Redeemable debentures: these debentures are redeemable at the end of specified period, that is company intends to repay the debentures after a specified period of time
4. Perpetual debentures: those which are redeemable on happening of a specified event which may or may not occur. For example a company may issue debentures redeemable on expiry of next cricket world cup.
5. Fully convertible debentures: these debentures are fully convertible into equity or preference shares at the end of specified period, at the option of debentureholder
6. Partially convertible debentures: these debentures contain two parts, one which company will repay after a specified period of time and other which is convertible into equity or preference shares of company at the end of specified period.
7. Non-convertible debentures: these debentures are not convertible into equity or preference shares