In this essay we will discuss about stock market:- 1. Definition of Stock Market 2. Structure of the Stock Market 3. New Issues Market (NIM) 4. Secondary Market in Old Issues Market 5. The Gilt-Edged Market.
Essay # Definition of Stock Market:
The Capital market or the stock market normally deals with long term securities, including both private and government securities. The securities market is considered as the most important component of the capital market. It deals with long term funds of different kinds which may be raised through open market securities or through negotiated loans.
The open market securities are securities are purchased and sold openly in the market and thereby can often change its hands. The negotiated loans are negotiated directly between the lender and the borrower. Such loans appear in the account book of the lenders.
Essay # Structure of the Stock Market:
Chart 14.4 reveals the scope and structure of the stock or securities market:
Thus the chart 14.4 shows that the stock or securities market comprises market for corporate securities as well as market for government securities. Corporate securities are those old instruments floated for raising long-term corporate capital from the public.
The stock market provides separate marketing arrangement for new issues (New Issues Market) and old issues market (Secondary market). Both the markets are essential for corporate borrowers as well as for investors.
Essay # New Issues Market (NIM):
The new issues market indicates a system of raising new capital by selling new shares and debentures issued by companies or corporate enterprises, whether new or old. The new issue market is also known as primary capital market. Thus NIM mostly involves attracting new investible funds or resources into number of corporate enterprises and their allocation for different uses.
The expansion of the Corporate Sector depends very much upon the inflow of resources. The new issues consist of equity shares, preferences shares or debentures issued by companies both new and old. Therefore it includes private firms already doing business but are ‘going public’ for expanding their capital bases.
Thus by ‘going public’ they covert their character into public limited companies so as to raise funds from the general public in the open market.
However, successful flotation of new issues and its proper management include three distinct services:
(b) Underwriting and
(c) Distribution of new issues.
The ‘origination’ indicates careful investigation of the viability and prospects of new projects by well established financial institutions, which can improve their acceptability among the investing public and other financial institutions.
The service of ‘Underwriting’ indicates the process of guaranteeing purchase of a definite or stipulated volume of new issues at a fixed price. Here the purchase may be for the sale of new issues to the public or for raising its own portfolio or for both. If the underwriter fails to sale these new issues then they may absorb it and undertake risks for realising commission.
The company also agree to bear the commission burden as a cost of raising funds in order to pass on the task of selling issues on to the underwriters. In case of a big issue, a group of underwriters manages the whole underwriting business smoothly.
Again, the ‘distribution’ indicates sale of stock to the public. Although the LIC, the UTI, term lending institutions and other financial institutions normally underwrite new issues for raising their own portfolios but a part of the new issues must be made open for general public.
However, the floating of new issues broadly involves three paths:
(a) By issuing prospectus to the public for sale of new issues,
(b) By private placement and
(c) By allowing rights issue to existing share-holders of an old corporation to subscribe to a part of new issue on the basis of their shareholding at a certain discount.
Thus, the new issues are gaining its importance for establishing new industries and also for expanding old ones so as to attain faster and higher rate of growth.
Essay # Secondary Market in Old Issues or Old Issues Market:
The secondary market is a market for old securities or issues. This market provides adequate liquidity to these securities and thereby it can be converted into cash at short notice maintaining its capital value. Thus, the secondary issues market provides a continuous market for securities where purchase and sale of securities can be done during business hours at minimum transaction cost effecting price variations. However, such market exists for active securities.
However, providing adequate liquidity to old stocks is important for attracting new finance for a corporate farm or a joint stock company. Prospective investors are also encouraged to invest both in old and new securities in such market. In the absence of such organised market, this facilities would not be available.
However, what is happening in old issue market, or secondary market can also influence the new issue market. Thus, secondary market protects the investment climate of the economy. With the increase in the prices of old issues, the prices of new issues also increase in the market for NIM.
Moreover, the secondary market has two segments:
(a) Organised Stock Exchange and
(b) Over-the- Counter-Market.
The organised stock exchange usually deals with ‘listed’ securities which are recorded in the organised stock exchanges. But the Over-the-Counter Market usually deals with those securities which are not listed in organised stock exchanges. The prices of such non-listed securities are determined through direct negotiation between stock brokers.
However, the prices of listed (approved) securities are fixed through open bidding in a stock exchange.
Stock Exchanges are market organization for orderly buying and selling of ‘listed’ or approved existing securities. Such organisation usually includes organised association of persons or firms for systematic regulating and supervising all transactions, rules, regulations and standard practices so as to govern all market transactions.
However, authorised stock brokers usually meet in the stock exchange hall where all these brokers or their agents meet together for buying and selling of securities during the fixed business hours. Presently, there are 22 stock exchanges in the country, out of which 20 SEs are regional in character with its allocated areas.
Two other stock exchanges set-up in the reform era, viz., National Stock Exchange (NSE) and over-the Counter Exchange of India (OCTEI) are mandated to have nationwide trading. The Bombay Stock Exchange (BSE) in the leading stock exchange of India in terms of number of securities listed there and also in terms of volume of transactions of securities.
Those securities are termed as listed securities, which are approved by the stock exchange on the basis of various considerations like size of issues, extent of holdings among the public, timely submission of its annual account etc. Thus, on the floor or hall of the stock exchange only listed or approved securities are traded.
Thus, organised stock exchange is an ‘auction’ type of market. Here through open bidding price of stocks are settled on the floor of stock exchange. Prices of stocks face frequent ups and downs which are often swayed by animal spirits and also through speculations.
Stock exchange is, therefore, an important institution for running the corporate type of firm in a smooth manner, giving adequate support to its financial condition.
The Gilt-Edged Market:
The gilt-edged market is an established market for government securities or other securities guaranteed (both principal amount and interest) by the government directly. In this type of market, the value of securities remain stable and, therefore) it is very much demanded by the banks and other financial institutions.
Government securities have been considered as a very important component of capital market in large number of countries.
The gilt-edged market may be broadly classified into two parts:
(a) The treasury bill market and
(b) The government bond market.
In respect of demand, the gilt-edged market is very much dominated by financial institutions. Moreover, semi-government bodies, local authorities and non-residents also show some interest in investing in government securities.
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