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Capital market is an organized market which provides fund in the form of capital to industrial enterprises through the savings of the society. It is market for all the types of financial securities. It becomes helpful in the economic growth by mobilizing the savings of the society.

It refers to that service through which the transfer of ownership in shares takes place only by means of book entry without the physical delivery of shares.

Meaning: It refers to that service through which the transfer of ownership in shares takes place by means of book entry without the physical movement of shares.

Participants:

i. The Depository: A depository is an institution which holds the shares of an investor in electronic form. It facilitates transactions in securities simply by means of book entry. At present, there are two depository institutions in India: — National Securities Depository Limited (NSDL) — Central Depository Services Limited (CDSL)

ii. The Depository Participant: A Depository Participant (DP) is an agent of the depository. He functions as a mediator between the issuing company and the investors through the depository. He opens the accounts and maintains the securities account balance of the investors and conveys them the status of their holding from time to time. As per SEBI guidelines, banks, stock brokers, etc. can become depository participants.

iii. The Investor: He is a person who wants to deal in shares and whose name is recorded with a depository. The investor is the real owner of the shares who has lodged them with the depository through book entry till the day he sells them.

iv. The Issuing Company: The issuing company is that organisation which issues the securities. The issuing company send a list of the shareholders to the depositories.

Functions of Financial Market:

1. Mobilisation of Savings and their Channellisation into more Productive Uses: Financial market gives impetus to the savings of the people. This market takes the uselessly lying finance in the form of cash to places where it is really needed. Many financial instruments are made available for transferring finance from one side to the other side. The investors can invest in any of these instruments according to their wish.

2. Facilitates Price Discovery: The price of any goods or services is determined by the forces of demand and supply. Like goods and services, the investors also try to discover the price their securities. The financial market is helpful to the investors in giving them proper price.

• In the past, when an investor wanted to invest in the shares of a company, he was given a share in the physical (paper) form. This share was known as share certificate and the purchaser or the holder of the share certificate was known as share-holder.
• Along with the share form, the investors also used to fill up share transfer form. Whenever a share-holder wanted to sell a share, he had to send the original share certificates along with a filled share transfer form to the company.
• This entire procedure was lengthy and tedious. To eliminate all these difficulties, the government started the procedure of converting these physical shares and other securities in electronic form.
• The process of converting physical shares in electronic form is called dematerialization or demat in short.
• These physical securities are maintained in electronic form through computer by the depository institutions. If a person wish to covert his physical shares in electronic form then he need to open a demat account with one of the depository institution.
• Under Depository Act 1996, investors have an option to hold securities either in physical form or dematerialized form.

Primary Capital Market or Secondary Capital Market

It is an account in which all securities are held electronically by canceling paper certificates through a process called dematerialization.

Dematerialization is the process of converting the certificates held by the investor in physical form to an electronic form through DEMAT Account.

They charge considerably lower brokerage for stock trading

Registration of share brokers who do not follow rules and guidelines determined by SEBI and who fail to provide necessary information to SEBI.

When an insider of a company i.e., Director, Promoter or any person connected with the company has reasonable information, which is not available to the general public and deals in securities of the company i.e., sale or purchase of securities with the intention of earning high profits, it is known as insider trading. For the protection of investors, SEBI has issued directions for the prohibition of insider trading.

Example: Mr. X, one of the directors of PQR Ltd. knew that bonus shares were to be announced in the next meeting and he expected the price to rise. He bought 10,000 shares. By the end of next month the price increased by Rs.9. He sold these shares and made a profit of Rs.90,000. Thus Mr. X gains because of him being an insider. This is known as insider trading.

De-materialisation

Stock index refers to the index used to capture the movement of the stock market. It is a barometer which measures overall market trend through a set of stocks which are representatives of the market An ideal index must represent changes in the prices of securities and also show the price movement of different classes of shares. 

Most of the stock market use the following 3 methods of calculating index.

a. Price weighted Index: An index reflecting the sum of the prices of the sample share in a certain year/month/week/day with reference to a base year. 

b. Equal Weighted Index: An index reflecting the simple arithmetic average of the price relatives of a sample of shares in a certain period with reference to a base year, 

c. Value Weighted Index: It is an index reflecting the aggregate market capitalization of the sample shares in certain period in relation to the base year.

Prices are determined at the intersection point of demand and supply forces of securities.

SEBI will exercise control over ‘R’ Limited by the following methods. 

a. Prohibiting fraudulent and unfair trade practices In the securities market, unfair trade practices include price rigging, making misleading statements etc. 

b. Prohibiting insider trading i.e., restricts the persons having access to price-sensitive information about the company to take undue advantage of it. 

c. Examing that adequate disclosure about the terms and conditions of redemption, security conversion and other relevant features of the new Instrument at the time of issue is made so that an investor can make a reasonable determination of risks returns, safety, and liquidity of the instrument.

Case Problem II 

                             NSI Indices

                             World markets

(a) National Securities Depository Limited (NSDL).

(b) Central Depository Services Limited (CDSL).

It refers to the market which deals in previously issued securities.

Differentiate between Capital Market and Money Market: 

It refers to the market in which securities are sold for the first time for collecting long-term capital.

Capital market includes all those organisations, institutions and instruments that provide long-terms and medium-term funds through shares, bonds, debentures, etc. It consists of development banks, commercial banks and stock exchanges.

Two segments of capital market:

(i) Primary Market: Primary market refers to the market wherein securities are sold for the first time. It is also known as New Issue Market. The securities through which a company can raise capital in primary market are: Equity Shares, Preference Shares, Debentures, etc.

(ii) Secondary Market: Secondary market refers to the market for sale and purchase of previously issued securities. It is also known as the Stock Market or Stock Exchange. In this market, securities are exchanged between the investors.

Capital market includes all those organisations, institutions and instruments that provide long-terms and medium-term funds through shares, bonds, debentures, etc. It consists of development banks, commercial banks and stock exchanges.

i. Primary Market and

ii. Secondary Market.

It refers to the market where transactions in long-term securities are made.

It refers to that market where transactions in short-term securities are made.

Money market is a market for short-term instruments. It is for procurement of money by borrowing or for lending the money. It is market for securities maturing within one year or shorter period.

• A market where short-term funds are borrowed and lent is called ‘money market 7. It is a market for financial assets that are close substitutes for money.
• The instruments dealt within the market are liquid and can be converted quickly into cash at a low transaction cost.

Definition: According to the Reserve Bank of India, “The money market is the center for dealings mainly of short-term characters in money assets; it needs the short-term requirements of borrowers and provides liquidity or cash to the lenders. It is a place where short-term surplus investible funds at the disposal of financial, institutions or individuals are bid by borrower’s agents comprising institutions and individuals and also by the government itself.”

Correct option is (A) Government Security

Correct option is (B) Primary capital

Correct option is (D) Both (A) and (B)

NASDAQ( National Association of securities dealers automated questions).

Because it reflects market direction and indicates day-to-day fluctuations in stock price. It measures the overall market sentiment.

Depository services are those service which are provided by a depository to its clients regarding maintaining their accounts of securities in electronic form.

Beneficial owner is the investor or account holder and is required to open Demat account for the trading of securities at the stock exchange.

Lines from the Para:

(a) "He called one of his rich friends Sudhir and asked him to invest Rs.5 crore in shares of his bank”.

(b) "On regular inspection and by conducting enquiries of the brokers involved, SEBI was able to detect this irregularity".

Functions that were performed by SEBI in the above case were:

(i) Regulatory function: 'On regular inspection and by conducting enquiries of the brokers involved, Securities and Exchange Board of India (SEBI) was able to detect this irregularity.'

SEBI can call for information by undertaking inspection, conducting enquiries and audits of stock exchanges and intermediaries.

(ii) Protective function: 'The SEBI imposed a heavy penalty on Vikash Mehra.'

SEBI controls insider trading and imposes penalties for such practices.

Demat account is an account which an investor is required to open with a depository through its any depository participant for availing depository services. 

Characteristics of Secondary market:

(i) It is a market for purchase and sale of existing securities.

(ii) Both buying and selling of securities can take place.

(iii) It is located at specified places.

(iv) The price of securities are determined by the demand and supply of the securities.

Investor education.

Prohibition of fraudulent and unfair trade practices. 

i. It creates liquidity.

ii. It has a particular place.

To carry on research work.

It is electronic form.

To register brokers, sub-brokers, transfer agents, merchant banks, underwriters, etc.

Development functions of SEBI are as follows:

(i) Training: Training of intermediaries of securities markets for their professional growth.

(ii) Developing Capital Markets: Undertaking measures to develop the capital markets by adopting a flexible approach.

(iii) Conducting Research: SEBI encourages research for improving the functioning of capital market, for streamlining the activities of stock exchange, for developing and strengthening the capital markets etc.

To check unfair trade practices in connection with security market.

(i) Training of intermediaries.

(ii) Conducting research and publishing information useful to all market participants.

(iii) Developing capital markets.

Three protective functions of SEBI are as follows:

(a) Prohibition of fraudulent and unfair trade practices like making misleading statements, price riggings, etc.

(b) Controlling insider trading and imposing penalties for such practices.

(c) Undertaking steps for investor's protection like registration of broker; audit of stock exchanges, registration of mutual funds etc.

SEBI: Securities and Exchange Board of India.

Sensex: Sensex is the benchmark index of BSE. It is a useful guide for investors in the stock market. If the Sensex rises, it indicates that the market is doing well and investors become optimistic of the future performance of the economy.

Sensex includes shares of thirty companies, most actively traded in.

Objectives of SEBI are:

(i) To regulate stock exchanges and the securities industry to promote their orderly functioning.

(ii) To protect the rights and interests of the investors, particularly, individual investors and to guide and educate them.

(iii) To prevent trading malpractices and achieve a balance between self regulation and statutory regulation.

(iv) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc., with a view to making them competitive and professional.

(v) To provide a market place in which the issuers can raise finances in an easy, fair and efficient manner.

(i) Prohibition, of fraudulent and unfair trade practices like asking misleading statements, manipulations, price rigging, etc.

(ii) Controlling insider trading.

(iii) Protecting investor's interest.

(iv) Promotion of fair practices and code of conduct.

Lines from the Para:

(a) "He called one of his rich friends Sudhir and asked him to invest Rs.5 crore in shares of his bank”.

(b) "On regular inspection and by conducting enquiries of the brokers involved, SEBI was able to detect this irregularity".

Functions that were performed by SEBI in the above case were:

(i) Regulatory function: 'On regular inspection and by conducting enquiries of the brokers involved, Securities and Exchange Board of India (SEBI) was able to detect this irregularity.'

SEBI can call for information by undertaking inspection, conducting enquiries and audits of stock exchanges and intermediaries.

(ii) Protective function: 'The SEBI imposed a heavy penalty on Vikash Mehra.'

SEBI controls insider trading and imposes penalties for such practices.