FUNDAMENTALS OF TRADING IN

STOCKS AND CURRENCIES

Semester – I

Student Workbook

2024
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Edition: 2024

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EXHAUSTIVE TOWARDS THE COURSE. THE STUDENTS MUST REFER
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 INDEX

Module Page No.

Syllabus 1

Module – 1 : Financial System 3

Module – 2 : Trading in Money Market 15

Module – 3 : Trading in Primary Market 28

Module – 4 : Trading in Secondary Market 33

Model Question Paper 43

 SYLLABUS

Program: BCom
Name of the Course: FUNDAMENTALS OF TRADING IN STOCKS AND CURRENCIES
Course Code: 22BC1S011
No. of Hours per Total No. of Teaching
Course Credits
Week Hours
2 Credits 2 Hrs. 30Hrs
Course Objective: -
❖ Support students to learn the concepts of trading in markets
❖ Assist students to gain relevant knowledge required for trading
❖ Aim to enable students as prospective traders.

Course Outcomes: On successful completion of the course, the Students will be able to
❖ To decide the framework of whole Indian Financial System.
❖ To evaluate the strategies of trading in various financial market.
❖ To decide the pros and cons of different financial markets in India
❖ To compare and contrast the various investment avenues.
Module 1: Financial system Hours
The Indian Financial System, components, roles and functions, Financial Markets-
Classification- Capital Market and Money Market, Role of RBI, SEBI – Establishment- 8
Objectives.
Module -2: Trading in Money Market
Meaning, features and Objectives of trading. Components of money markets - Call
Money Markets, Repos and reverse Repo concepts, Treasury Bill Markets, Market for
8
Commercial Paper, Commercial paper and Certificate of Deposit. Trading and
settlement procedures in money market.
Module 3: Trading in Primary Market
Meaning, Functions of New Issue Market. Methods of New Issue – IPO – FPO – ASBA-
7
Green Shoe Option- Public Issue – Bonus Issue- Right Issue- Private Placement.
Module 4: Trading in Secondary Market
Secondary market – Role and Functions of Stock Exchanges, Listing of Securities, Stock
Exchanges in India, Members of the Stock Exchanges, Methods of Trading in a Stock 7
Exchange, Online Demat account and Trading – Stock Market Indices.

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Skill Development Activities:

1. Case study Analysis

2. Business Simulations
3. Role plays
4. Asynchronous Learning

Reference Books:-

1. Pathak, Bharathi. V.P.:Indian Financial System, Pearson Education India

2. Singh, Preethi : Dynamics of Indian Financial System,Ane Books Pvt. Ltd.

3. Guruswami,S.Capital Markets, Tata McGraw Hill, New Delhi

4. Khan. M.Y : Indian Financial System,Tata McGraw Hill,New Delhi

5. Avadhani,V.A.,Investment And Security Markets in India, Himalaya Publishing House

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 MODULE 1
FINANCIAL SYSTEM

• Introduction - The Indian Financial System

• Components of the Indian financial system

• Roles and functions of the Indian financial system

• Meaning of Financial Markets

• Classification of Financial Markets

• Role of RBI

• Role of SEBI

• Terminal questions

1.1 Introduction - The Indian Financial System

The Indian financial system can also be broadly classified into the formal (organized) financial
system and the informal (unorganized) financial system. The formal financial system comes
under the purview of the Ministry of Finance (MoF), the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI), and other regulatory bodies.

The informal financial system consists of:

• Individual money lenders such as neighbors, relatives, landlords, traders, and storeowners.
• Groups of persons operating as ‘funds’ or ‘associations.’ These groups function under a system
of their own rules and use names such as ‘fixed fund,’ ‘association,’ and ‘saving club.’
• Partnership firms consisting of local brokers, pawnbrokers, and non-bank financial
intermediaries such as finance, investment, and chit-fund companies. In India, the spread of
banking in rural areas has helped in enlarging the scope of the formal financial system.

1.1.1 Meaning of Financial System

A financial system is a system that allows the exchange of funds between financial market
participants such as lenders, investors, and borrowers. Financial systems operate at national and
global levels. Financial institutions consist of complex, closely related services, markets, and
institutions intended to provide an efficient and regular linkage between investors and
depositors.

In other words, financial systems can be known wherever there exists the exchange of a financial
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 medium (money) while there is a reallocation of funds into needy areas (financial markets,
business firms, banks) to utilize the potential of ideal money and place it in use to get benefits
out of it. This whole mechanism is known as a financial system.

Money, credit, and finance are used as media of exchange in financial systems. They serve as a
medium of known value for which goods and services can be exchanged as an alternative to
bartering. A modern financial system may include banks (public sector or private sector),
financial markets, financial instruments, and financial services. Financial systems allow funds
to be allocated, invested, or moved between economic sectors, and they enable individuals and
companies to share the associated risks.

1.1.2 The Components of a financial system

There are mainly four components of the financial system:

• Financial Markets - The market place where buyers and sellers interact with each
other and participate in the trading of bonds, shares and other assets are called
financial markets.

• Financial Assets - The products which are traded in the financial markets are called
financial assets. Based on different requirements and credit seekers, the securities in
the market also differ from each other’s.

• Financial Institutions - Financial institutions are acting as a mediator between the

investors and borrowers. They provide financial services for members and clients. It
is also termed as financial intermediaries because they act as middlemen between the
savers and borrowers. The investor's savings are mobilized either directly or
indirectly via the financial markets. They offer services to organizations who want
to raise funds from markets and take care of financial assets (deposits, securities, loan,
etc).

• Financial Services - Services provided by assets management and liabilities

management companies. They help to get the required funds and also make sure that
they are efficiently invested. (eg. banking services, insurance services and investment
services)

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 1.1.3 Roles and Functions of financial system in economic development of a country

The development of any country depends on the economic growth the country achieves over
a period of time. Economic growth deals about investment and production and also the extent
of Gross Domestic Product in a country. Only when this grows, the people will experience
growth in the form of improved standard of living, namely economic development.

The following are the roles of financial system in the economic development of a country.

• Savings-investment relationship

To attain economic development, a country needs more investment and production. This can
happen only when there is a facility for savings. As, such savings are channelized to
productive resources in the form of investment. Here, the role of financial institutions is
important, since they induce the public to save by offering attractive interest rates. These
savings are channelized by lending to various business concerns which are involved in
production and distribution.
• Financial systems help in growth of capital market

Any business requires two types of capital namely, fixed capital and working capital. Fixed
capital is used for investment in fixed assets, like plant and machinery. While working capital
is used for the day-to-day running of business. It is also used for purchase of raw

materials and converting them into finished products.

• Fixed capital is raised through capital market by the issue of debentures and shares. Public and
other financial institutions invest in them in order to get a good return with minimized risks.

• For working capital, we have money market, where short-term loans could be raised by the
businessmen through the issue of various credit instruments such as bills, promissory notes, etc.
Foreign exchange market enables exporters and importers to receive and raise funds for
settling transactions. It also enables banks to borrow from and lend to different types of
customers in various foreign currencies. The market also provides opportunities for the banks
to invest their short term idle funds to earn profits. Even governments are benefited as they
can meet their foreign exchange requirements through this market.

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 • Government Securities market
Financial system enables the state and central governments to raise both short-term and long-
term funds through the issue of bills and bonds which carry attractive rates of interest along
with tax concessions. The budgetary gap is filled only with the help of government securities
market. Thus, the capital market, money market along with foreign exchange market and
government securities market enable businessmen, industrialists as well as governments to
meet their credit requirements. In this way, the development of the economy is ensured by
the financial system.

• Financial system helps in Infrastructure and Growth

Economic development of any country depends on the infrastructure facility available in the
country. In the absence of key industries like coal, power and oil, development of other
industries will be hampered. It is here that the financial services play a crucial role by
providing funds for the growth of infrastructure industries. Private sector will find it difficult
to raise the huge capital needed for setting up infrastructure industries. For a long time,
infrastructure industries were started only by the government in India. But now, with the
policy of economic liberalization, more private sector industries have come forward to start
infrastructure industry. The Development Banks and the Merchant banks help in raising
capital for these industries.

• Financial system helps in development of Trade

The financial system helps in the promotion of both domestic and foreign trade. The financial
institutions finance traders and the financial market helps in discounting financial
instruments such as bills. Foreign trade is promoted due to per-shipment and post-shipment

finance by commercial banks. They also issue Letter of Credit in favor of the importer. Thus,
the precious foreign exchange is earned by the country because of the presence of financial
system. The best part of the financial system is that the seller or the buyer do not meet each
other and the documents are negotiated through the bank. In this manner, the financial system
not only helps the traders but also various financial institutions. Some of the capital goods
are sold through hire purchase and installment system, both in the domestic and foreign trade.
As a result of all these, the growth of the country is speeded up.

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 • Employment Growth is boosted by financial system
The presence of financial system will generate more employment opportunities in the
country. The money market which is a part of financial system, provides working capital to
the businessmen and manufacturers due to which production increases, resulting in
generating more employment opportunities. With competition picking up in various sectors,
the service sector such as sales, marketing, advertisement, etc., also pick up, leading to more
employment opportunities. Various financial services such as leasing, factoring, merchant
banking, etc., will also generate more employment. The growth of trade in the country also
induces employment opportunities. Financing by Venture capital provides additional
opportunities for techno-based industries and employment.

• Venture Capital
There are various reasons for lack of growth of venture capital companies in India. The
economic development of a country will be rapid when more ventures are promoted which
require modern technology and venture capital. Venture capital cannot be provided by
individual companies as it involves more risks. It is only through financial system, more
financial institutions will contribute a part of their investable funds for the promotion of new
ventures. Thus, financial system enables the creation of venture capital.

• Financial system ensures Balanced growth

Economic development requires a balanced growth which means growth in all the sectors
simultaneously. Primary sector, secondary sector and tertiary sector require adequate funds
for their growth. The financial system in the country will be geared up by the authorities in
such a way that the available funds will be distributed to all the sectors in such a manner,
that there will be a balanced growth in industries, agriculture and service sectors.

1.2 Financial Markets

Financial markets play a vital role in facilitating the smooth operation of capitalist economies
by allocating resources and creating liquidity for businesses and entrepreneurs. The markets
make it easy for buyers and sellers to trade their financial holdings. Financial

markets create securities products that provide a return for those who have excess funds
(Investors/lenders) and make these funds available to those who need additional money
(borrowers). The stock market is just one typeof financial market. Financial markets are made
by buying and selling numerous types of financial instruments including equities, bonds,
currencies, and derivatives. Financial markets rely heavily on informational transparency to

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 ensure that the markets set prices that are efficient and appropriate. The market prices of
securities may not be indicative of their intrinsic value because of macroeconomic forces like
taxes.

• 1.2.1 Meaning of Financial Markets

Financial markets refer broadly to any marketplace where the trading of securities occurs,
including the stock market, bond market, forex market, and derivatives market, among
others. Financial markets are vital to the smooth operation of capitalist economies.

1.2.2 Types of Financial Markets

• Stock Markets

As the name suggests, a stock market is a marketplace where buyers and sellers meet to trade
i.e., buy and sell shares of publicly listed companies. A stock market is fondly known as a
share market, equity market or share bazaar. In simple terms, if Ram wants to sell 10 shares
of Reliance Industries at Rs 1990/ share, he will place a sell order on the stock exchange. The
stock exchange will then find a buyer who wants to buy 10 shares of Reliance Industries at
Rs 1990/ share. So, the stock market is a virtual market where the buyers and sellers meet to
trade shares.

The two types of stock markets are:

• Primary markets
• Secondary markets

• Capital Market: There are two main categories of capital markets: Primary markets and
secondary markets.
a) Primary Markets: Primary capital markets are where companies first sell new stock or
bonds publicly. Also known as the 'New Issues Market', it is a place where businesses and
governments seek out new financing. The new money is converted into debt or shares of the
company. Debt or stocks are locked in until they are sold on a secondary market, repurchased
by the company, or mature.
Primary capital markets trade two major financial instruments: equities (stocks) and debt.
An Initial Public Offering (IPO) is the process of introducing new equities to the market. It's
simply the process of selling part of a company to the public for capital.

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 Bonds, on the other hand, are a bit more complicated. Underwriters act as intermediaries in the
issuance of bonds. If Company A wants to issue INR 10 crore in bonds, it goes to the
underwriter. These bonds are then issued and sold by the underwriter to investors.

In this instance, the underwriter is responsible for ensuring that Company A gets the capital it
needs. A bond underwriter buys bonds from Company A and then sells them on the market -
typically at a higher price. The underwriter then takes on the risk, but Company A receives the
entire loan.

b) Secondary Market
Investors trade old debt or stocks on the secondary capital market. It differs from the primary
market because the debt has already been issued here.

Investors trade stock in the secondary capital markets through exchanges such as the Bombay
Stock Exchange, the Calcutta Stock Exchange, and the New York Stock Exchange. A stock
exchange also allows people to sell the old stock if they no longer want it, which results in the
'liquidation' of these stocks. Thus, the seller now has cash rather than an asset.

Unlike stocks, bonds are typically held for a longer period - usually until they expire. However,
those who hold bonds but need cash quickly can rely on the secondary market.

Investors use the secondary market to obtain cash, either to invest in another stock or for
personal consumption. It involves liquidating assets so that other things can be purchased.

Functions of Capital Market

1. Links Borrowers and Investors: Capital markets serve as an intermediary between people with
excess funds and those in need of funds.

2. Capital Formation: The capital market plays an important role in capital formation. By timely
providing sufficient funds, it meets the financial needs of different sectors of the economy.

3. Regulate Security Prices: It contributes to securities' stability and systematic pricing. The
system monitors whole processes and ensures that no unproductive or speculative activities occur.
A standard or minimum interest rate is charged to the borrower. As a result, the economy's security
prices stabilize.
4. Provides Opportunities to Investors: The capital markets have enough financial instruments to
meet any investor's needs, regardless of the risk level. Capital markets also provide investors with
the opportunity to increase their capital yields. The interest rate on most savings accounts is

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 extremely low compared to the rate on equities. Therefore, investors can earn a
higher rate of return on the capital market, though some risks are involved as well.
5. Minimizes Transaction Cost and Time: Long-term securities are traded on the capital market.
The whole trading process is simplified and reduced in cost and time. A system and program
automate every aspect of the trading process, thus speeding up the entire process.
6. Capital Liquidity: The financial markets allow people to invest their money. In exchange, they
receive ownership of a stock or bond. Bond certificates cannot be used to purchase a car, food, or
other assets, so they may need to be liquidated. Investors can sell their assets for liquid funds to a
third party on the capital markets.

Money Market:
Money market refers to the market where money and highly liquid marketable securities are bought
and sold having a maturity period of one or less than one year. The money market constitutes a
very important segment of the Indian financial system. Over-the-counter trading is done in the
money market through oral communication and without the help of any brokers. Large volume of
short-term funds is traded in money market. It is used by the participants as a way of borrowing
and lending for the short term.

Features of Money Market Funds

1. High Liquidity
The maturity period of one year offered by these funds makes them highly liquid. Additionally,
these funds tend to generate fixed income for the investors in such a short period; owing to which
they are taken for close substitutes of money.

2. Secure Investment: These financial instruments are considered one of the most secure
investment avenues available in the market. Since issuers of money market instruments have a high
credit rating and the returns are fixed beforehand, the risk of losing the invested capital is minuscule.

3. Fixed returns
Since money market instruments are offered at a discount to the face value, the amount the investor
gets on maturity is decided in advance. This effectively helps individuals choose the instrument that
suits their financial needs and investment horizon.

4. Physical trading
Money markets across the world essentially operate over the counter, implying that these funds
cannot be traded online. Hence, investments in the money market are made physically by authorized
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 representatives or in person.

5. Wholesale Market
Money markets are designed to provide and accept bulk orders. Thus, retail investors who have
enough capital can directly participate in money markets, while individual investors must invest in
debt mutual funds that invest in money markets in order to benefit from this market.

6. Multiple Instruments
Unlike capital markets which usually trade in one single type of instrument, money markets trade
is multiple instruments. These instruments differ in terms of maturity periods, debt structure, credit
risk, currency, among others. Money market instruments are therefore considered ideal for
diversification through exposure.

7. Key Money Market Participants

Since money markets deal with only bulk orders, they are not open to individual investors. As a
result, multiple institutional investors such as financial institutions and dealers looking to borrow
or lend money for a short term participate in trading these instruments.

8. Regulated by RBI
The Indian money market is controlled and regulated by the Reserve Bank of India. RBI is the only
institution that can influence the organized sector, while the smaller unorganised sector is largely
beyond its control. However, due to the considerably larger size of this organised sector, regulatory
actions taken by the RBI can substantially impact how this entire market operates.

• Over-the-Counter Markets
An over-the-counter (OTC) market is a decentralized market in which market participants trade
stocks, commodities, currencies, or other instruments directly between two parties and without a
central exchange or broker. Over-the-counter markets do not have physical locations; instead,
trading is conducted electronically. This is very different from an auction market system.

• Bond Markets
The bond market broadly describes a marketplace where investors buy debt securities that are
brought to the market by either governmental entities or corporations. The bond market—often
called the debt market, fixed-income market, or credit market—is the collective name given to all
trades and issues of debt securities. Governments typically issue bonds in order to raise capital to

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 pay down debts or fund infrastructural improvements.

• Derivatives Markets

The derivatives market refers to the financial market for financial instruments such as futures
contracts or options. There are four kinds of participants in a derivatives market: hedgers,
speculators, arbitrageurs, and margin traders. There are four major types of derivative
contracts: options, futures, forwards, and swaps.

• Forex Market

The forex market allows participants, such as banks and individuals, to buy, sell or exchange
currencies for both hedging and speculative purposes. The foreign exchange (forex) market
is the largest financial market in the world and is made up of banks, commercial companies,
central banks, investment management firms, hedge funds, retail forex brokers, and
investors. The forex market operates 24 hours, 5.5 days a week, and is responsible for trillions
of dollars in daily trading activity. Forex trading can provide high returns but also brings
high risk. The forex market is made up of two levels: the interbank market and the over-the-
counter (OTC) market. Many forex accounts can be opened with as little as $100.

• Commodities Markets

A commodity market is a marketplace for buying, selling, and trading raw materials or
primary products. There are hard commodities, which are generally natural resources, and
soft commodities, which are livestock or agricultural goods. Spot commodities markets
involve immediate delivery, while derivatives markets entail delivery in the future. Investors
can gain exposure to commodities by investing in companies that have exposure to
commodities or investing in commodities directly via futures contracts. The major U.S.
commodity exchanges are ICE Futures U.S. and the CME Group, which holds

four major exchanges: the Chicago Board of Trade, the Chicago Mercantile Exchange, the
New York Mercantile Exchange, and the Commodity Exchange, Inc.
• Crypto currency Markets

Cryptocurrency is decentralized digital money that is based on blockchain technology and secured
by cryptography. To understand cryptocurrency, one needs to first understand three terminologies
– blockchain, decentralization, and cryptography.

In simple words, blockchain in the context of cryptocurrency is a digital ledger whose access is

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 distributed among authorized users. This ledger records transactions related to a range of assets,
like money, house, or even intellectual property. The access is shared between its users and any
information shared is transparent, immediate, and “immutable”. Immutable means anything that
blockchain records is there for good and cannot be modified or tampered with – even by an
administrator. Centralized money refers to the regular money that we use, which is governed by
authorities like the Reserve Bank of India. Decentralization in cryptocurrency means there is no
similar authority that can be held responsible for supervising the rise and fall of a particular
cryptocurrency. This has many benefits over centralized money.

1.3 Role of Reserve Bank of India

The Reserve Bank of India (RBI) is the apex financial institution of the country’s financial
system entrusted with the task of control, supervision, promotion, development and planning.
RBI is the queen bee of the Indian financial system which influences the commercial banks’
management in more than one way. The RBI influences the management of commercial
banks through its various policies, directions and regulations. Its role in bank management is
quite unique. In fact, the RBI performs the four basic functions of management, viz.,
planning, organizing, directing and controlling in laying a strong foundation for the
functioning of commercial banks. In 1921, the Imperial Bank of India was established to
perform as Central Bank of India by the British Government. But unfortunately, Imperial
Bank failed to show its performance up to the mark and didn’t achieve any success as the
Central Bank. So, Government required setup of brand-new central bank. In 1st April 1935,
Reserve Bank of India was setup. In January, 1949, RBI was nationalized.

Objective and Establishment of RBI

Objectives of the Important aspects relating to objectives of the Reserve Bank of

Reserve Bank of
India (RBI) are as follows:
India (RBI)
(1) Primary objects: Preamble to the RBI Act, 1934 spells out
the objectives of the RBI as:
(a) To regulate the issue of bank notes.
(b) To keep reserves with a view to securing monetary stability
in India.
(c) To operate currency and credit system of the country to its
advantage. Prior to the establishment of the RBI, the Indian
financial system was totally inadequate on account of the

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 inherent weakness of the dual control of currency by the Central
Government and of credit by the Imperial Bank of India. The
Hilton-Young Commission, therefore, recommended division of
functions and responsibility for control of currency and credit
and the divergent policies by setting-up of a central bank called
the RBI – which would regulate the financial policy and
develop banking facilities throughout the
country. Hence, the RBI was established with this primary object
in view.
(2) Remain free from political influence: Another objective of
the RBI has been to remain free from political influence and
be in successful operation for maintaining financial stability and
credit.

(3) Fundamental objects: Fundamental object of the RBI is to

discharge purely central banking functions in the Indian money
market i.e. to act as

(a) Note-issuing authority

(b) Bankers’ bank
(c) Banker to government
(4) Promote the growth of the economy: RBI aims to
promote the growth of the economy within the framework of
the general economic policy of the Government, consistent
with the need of maintenance of price stability.

(5) Development of Indian Economy: A significant object of

the RBI has also been to assist the planned process of
development of the Indian economy. Besides the traditional
central banking functions, with the launching of the 5 year
plans in the country, the RBI has been moving ahead in
performing a host of developmental and promotional
functions, which are normally beyond the purview of a
traditional Central Bank.

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 Establishment and
Establishment & incorporation: A bank to be called the RBI
incorporation of
Reserve Bank shall be constituted for the purposes of taking over the
[Section 3]
management of the currency from the Central Government and of
carrying on the business of banking in accordance with the
provisions of the Act.
RBI shall be a body corporate: The RBI shall be a body
corporate by the name of the RBI, having perpetual succession
and a common seal and shall by the said name sue and be sued.
Capital: The capital of the RBI shall be ` 5 Crore.

Offices, branches & agencies: The RBI shall establish offices in

Bombay, Calcutta, Delhi and Madras and may establish branches
or agencies in any other place in India with the previous sanction
of the Central Government.

Main Functions
Monetary Authority:
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability while keeping in mind the objective of growth.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which the country's banking and
financial system functions.
Objective: maintain public confidence in the system, protect depositors' interest and provide cost-
effective banking services to the public.

Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.

Issuer of currency:
Issues, exchanges and destroys currency notes as well as puts into circulation coins minted by
Government of India.
Objective: to give the public adequate quantity of supplies of currency notes and coins and in
good quality.

Developmental role
Performs a wide range of promotional functions to support national objectives.

Regulator and Supervisor of Payment and Settlement Systems:

Introduces and upgrades safe and efficient modes of payment systems in the country to meet the
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 requirements of the public at large.
Objective: maintain public confidence in payment and settlement system

Related Functions
• Banker to the Government: performs merchant banking function for the central and the state
governments; also acts as their banker.
• Banker to banks: maintains banking accounts of all scheduled banks.

Offices
• The Reserve Bank of India has offices at 33 locations.

1.4 SECURITIES EXCHANGE BOARD OF INDIA (SEBI):

This regulatory authority acts as a watchdog for all the capital market participants and its main purpose
is to provide such an environment for the financial market enthusiasts that facilitate the efficient and
smooth working of the securities market. SEBI also plays an important role in the economy. To make
this happen, it ensures that the three main participants of the financial market are taken care of, i.e.
issuers of securities, investors, and financial intermediaries.
• Issuers of securities

These are entities in the corporate field that raise funds from various sources in the market. This
organization makes sure that they get a healthy and transparent environment for their needs.
• Investor
Investors are the ones who keep the markets active. This regulatory authority is responsible
for maintaining an environment that is free from malpractices to restore the confidence of
the general public who invest their hard-earned money in the markets.

• Financial Intermediaries

These are the people who act as middlemen between the issuers and investors. They make the financial
transactions smooth and safe.

Objectives of SEBI:
The objectives of the Stock Exchange Board of India are:
• Protection to the investors
The primary objective of SEBI is to protect the interest of people in the stock market and
provide a healthy environment for them.

• Prevention of malpractices
This was the reason why SEBI was formed. Among the main objectives, preventing
malpractices is one of them.
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 • Fair and proper functioning
SEBI is responsible for the orderly functioning of the capital markets and keeps a close
check over the activities of the financial intermediaries such as brokers, sub-brokers, etc.

Organizational Structure:
The SEBI Board consist of nine members-
1. One Chairman appointed by the Government of India
2. Two members who are officers from Union Finance Ministry
3. One member from Reserve Bank of India
4. Five members appointed by the Union Government of India

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 TERMINAL QUESTIONS

Section A (5 Marks)
BL CO

1. Explain the role of Indian Financial system 2 1

2. Discuss the components of Financial System 2 1
3. Explain in brief the classification of Financial Markets 2 1
4. State the establishment and objectives of RBI 1 1
5. Explain the objectives of SEBI 2 1

Section B (9Marks)

BL CO
1. Outline the role of RBI in Indian Financial system 2 1
2. Discuss the role of SEBI in Indian Financial System 2 1
3. Explain the functions of Indian Financial System 2 1
4. Explain the functions of Indian Financial System 2 1

Section C (12 Marks)

BL CO
1 Explain in detail the objectives of SEBI and RBI. 2 1
2 Explain the role of financial system in economic development 2 1

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 MODULE- 2
TRADING IN MONEY MARKET

• Meaning of Money Market

• Features of Money Market

• Objectives of Money Market

• Components of Money Market

• Types of Money Market Instruments

➢ Call Money Market

➢ REPOS

➢ Treasury Bill Market

➢ Commercial Paper

➢ Certificate of deposit

• Trading & Settlement Procedure in Money Market

MEANING OF MONEY MARKET

Financial instruments with short term maturity up to 1 year, used as tools for raising capital by the
issuer are known as money market instruments. These are debt securities that offer a fixed interest
rateand are generally unsecured. There is no collateral backing up the security, and the risk of non-
repayment is theoretically high. However, money market instruments have a high credit rating
ensuring that issuers don’t default, which makes them a go-to avenue for investors looking for
options to park their money for the short term and earn fixed returns on the same.

FEATURES OF MONEY MARKET

1. Short-term Maturities:
Money market instruments typically have maturities ranging from one day to one year. These short
maturities help reduce the risk of significant price fluctuations due to interest rate changes. Investors
and institutions prefer these instruments for their ability to quickly convert to cash, providing excellent
liquidity. This feature makes money market instruments ideal for managing short-term cash needs and
surplus funds.

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 2. High Liquidity:
The money market is characterized by high liquidity, meaning that instruments can be quickly bought
or sold with minimal impact on their price. This liquidity is crucial for businesses and financial
institutions that need to manage their cash flows efficiently. Instruments like Treasury bills and
commercial paper are highly liquid, allowing investors to access their funds rapidly. High liquidity
ensures that the market remains stable and functional even during periods of economic stress.

3. Low Risk:
Money market instruments are generally considered low-risk investments due to their short maturities
and the high credit quality of issuers. Governments, large financial institutions, and corporations with
strong credit ratings typically issue these instruments, reducing the risk of default. The low-risk nature
of money market instruments makes them a safe haven for investors looking to preserve capital. This
feature is particularly appealing during times of market volatility and economic uncertainty.

4. Standardized Instruments:
Money market instruments are highly standardized, which simplifies the trading process and enhances
market efficiency. Common instruments include Treasury bills, certificates of deposit, commercial
paper, and repurchase agreements. Standardization ensures that these instruments are widely
recognized and easily understood by market participants. This uniformity facilitates smooth
transactions and helps maintain transparency and fairness in the market.

5. Role in Monetary Policy:

The money market plays a crucial role in the implementation of monetary policy by central banks.
Through open market operations, central banks buy and sell money market instruments to influence
short-term interest rates and control the money supply. These actions help manage inflation, support
economic growth, and stabilize the financial system. The effectiveness of monetary policy heavily
relies on the functioning and stability of the money market, making it a vital component of the overall
financial infrastructure.

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 MONEY MARKET OBJECTIVES
The objectives of the Money Market can be summarized as follows:
• Short-term financing:
The money market provides a mechanism for businesses, financial institutions, and
governments to access funds on a short-term basis, typically up to one year. This is crucial for
managing daily operations, covering temporary cash shortages, or taking advantage of
investment opportunities without long-term commitments. By providing quick and easy access
to funds, the money market helps maintain the liquidity and smooth functioning of the financial
system. It ensures that short-term financing needs are met efficiently and cost-effectively.

• Liquidity management: Providing a platform for efficient management of cash positions.

Liquidity management is essential for financial stability, and the money market plays a vital
role in this aspect. It allows institutions to manage their cash positions effectively, ensuring
they have sufficient liquidity to meet their short-term obligations. By enabling the buying and
selling of short-term instruments, the money market helps balance temporary surpluses and
deficits in cash flows. This process contributes to the overall stability and predictability of the
financial system, reducing the risk of liquidity crises.

• Low-risk investments:
The money market is known for its low-risk investment opportunities, making it an attractive
option for conservative investors. Instruments like Treasury bills, commercial paper, and
certificates of deposit are considered safe due to their short maturities and high credit quality.
These investments provide stable and predictable returns, making them ideal for risk-averse
individuals and institutions. By offering secure investment options, the money market helps
preserve capital while generating modest returns.

• Benchmark interest rates:

Money market instruments are often used as benchmarks to set interest rates for various other
financial products. Rates such as the LIBOR or the federal funds rate are derived from money
market activities and serve as reference points for loans, mortgages, and other financial
contracts. These benchmark rates reflect the cost of short-term borrowing and influence broader
economic conditions. By providing a basis for pricing, the money market ensures consistency
and transparency in the financial markets.

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 • Monetary policy implementation:
Central banks use the money market to implement monetary policy and control the supply of
money in the economy. By engaging in open market operations, such as buying and selling
government securities, central banks influence short-term interest rates and liquidity levels.
These actions help achieve economic objectives like controlling inflation, promoting
employment, and stabilizing the currency. The money market thus plays a critical role in the
effective implementation of monetary policy.

• Market stability and transparency:

The money market operates under strict regulations and oversight to maintain stability and
transparency. Regulatory bodies monitor activities, enforce rules, and ensure that participants
adhere to standards of conduct. This oversight helps prevent fraud, reduce systemic risk, and
maintain investor confidence. By ensuring a stable and transparent marketplace, the money
market contributes to the overall health and efficiency of the financial system.

COMPONENTS OF MONEY MARKET

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 The various institutions in the money market generally include the following:

1. Central Bank:

It is naturally to be the leader of all banks. It is the bank, which is entrusted with the task of
controllingthe issue of money and funds to the market and regulates credit facilities provided by
various other institutions.

2. Commercial Banks:

They play a vital role in the money market. They make advances, discount bills and lend against
the promissory notes and the like. They also take help of the market in solving their liquidity
problems.

3. Discount Houses:

Discount houses are special institutions for rediscounting the bills of exchange. They usually deal
in three kinds of bills.

(a) The domestic bills

(b) The foreign bills and

(c) The government treasury bills.

The discount houses borrow huge funds for short periods from the commercial banks and RBI and
invest them in discounting bills. But before discounting a trade bill of exchange, the Discount
House insists that it should be accepted by an Acceptance House.

Organized Money Market

These markets have standardized and systematic rules, regulations and procedures to govern the
financial dealings. Organized money market are governed and regulated by Government and
Reserve Bank of India. It consists of Reserve Bank of India and other banks, financial institutions,
specialized financial institutions, non-banking financial institutions, quasi government bodies and
government bodies who supply funds through money market.

Unorganized Money Market

Unorganized market consists of indigenous bankers and money lenders. They collect deposits and
lend money. A part from them there are certain private finance companies or non-banking
companies, chit funds etc. Reserve Bank of India has taken a number of steps to regulate such type

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 of institutions and bring them in the organized sector. One of such step is issuing of non-banking
Financial Companies Act, 1998.

Sub Market

It consists of call money market and bill market. Bill market consists of commercial bill market
and Treasury bills market, certificates of deposits, and commercial papers.

INSTRUMENTS OF THE MONEY MARKET

Following are the types of Money Market Instruments:

1. Treasury Bills (T-Bills)

Treasury bills or T- Bills are issued by the Reserve Bank of India on behalf of the Central
Government for raising money. They have short term maturities with highest up to one year.
Currently, T- Bills are issued with 3 different maturity periods, which are, 91 days T-Bills, 182
days T- Bills, 1 year T – Bills. T-Bills are issued at a discount to the face value. At maturity, the
investor gets the face value amount. This difference between the initial value and face value is the
return earned by the investor. They are the safest short term fixed income investments as they are
backed by the Government of India.

For example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that
is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-. The return
to the investors is the difference between the maturity value or the face value (that is Rs.100) and
the issue price.

2. Commercial Papers

Large companies and businesses issue promissory notes to raise capital to meet short term business
needs, known as Commercial Papers (CPs). These firms have a high credit rating, owing to which
commercial papers are unsecured, with company’s credibility acting as security for the financial
instrument. Corporates, primary dealers (PDs) and All-India Financial Institutions (FIs) can issue
CPs. CPs have a fixed maturity period ranging from 7 days to 270 days. However, investors can
trade this instrument in the secondary market. They offer relatively higher returns compared to that
from treasury bills.

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 Example
Calculate the interest yield of the following commercial paper:

Face Value: $500,000

Sale Price: $490,000

Maturity period: 100

Brokerage and Other charges: 3%

Solution:

Brokerage = 3% of $500,000 = $15,000

Net Sale Price = $495,000 – $15,000 = $475,000

Yield = [(Face Value – Sale Price)/Sale Price] * (360/Maturity Period) * 100

= (500,000 – 475,000)/475,000 * (360/100) * 100

= 18.95%

3. Certificates of Deposits (CD)

CDs are financial assets that are issued by banks and financial institutions. They offer fixed interest
rate on the invested amount. The primary difference between a CD and a Fixed Deposit is that of
the value of principal amount that can be invested. The former is issued for large sums of money (
1 lakh or in multiples of 1 lakh thereafter). Because of the restriction on minimum investment
amount, CDs are more popular amongst organizations than individuals who are looking to park
their surplus for short term, and earn interest onthe same. The maturity period of Certificates of
Deposits ranges from 7 days to 1 year, if issued by banks. Other financial institutions can issue a
CD with maturity ranging from 1 year to 3 years.
Example : India's Canara Bank plans to raise funds through the sale of certificates of deposit
maturing in three months. The state-run lender will offer a yield of 6.92% on the issue, for which
it has received commitments worth 10 billion rupees ($121.03 million) . The notes are rated A1+
by CRISIL.

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 4. Repo (Repurchase Agreements)

Repo (Repurchasing Option) is a contract in which banks gives eligible securities such as Treasury
Bills to the RBI while availing overnight loans with a commitment to buy them back. The interest rate
charged on repo transactions is called repo rate.
Following components are there under a repo transaction between the RBI and a commercial
bank:
1. Bank gives eligible securities (securities identified by the RBI{like government bonds} and at
the same time which are above the SLR limit).
2. RBI gives one day/overnight loan to the bank
3. RBI charges an interest rate called repo rate from the bank
4. Banks repays the loan after one day and repurchases the security it has given as collateral.

Repurchase Agreements are a formal agreement between two parties, where one party sells a
security to another, with the promise of buying it back at a later date from the buyer. It is also called
a Sell-Buy transaction, repos or buybacks. The seller buys the security at a predetermined time and
amount which also includes the interest rate at which the buyer agreed to buy the security. The
interest rate charged by the buyer for agreeing to buy the security is called Repo rate. Repos come-
in handy when the seller needs funds for short- term, she/he can just sell the securities and get the
funds to dispose. The buyer gets an opportunity to earn decent returns on the invested money.
Example :
A share repurchase and preference share sale agreement between Alibaba Group and Yahoo.
A collared accelerated share repurchase transaction between NetApp and Bank of America.
A stock repurchase agreement and a dividend repayment and stock repurchase program by
HomeAway.

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 Reverse repo
On the other hand, reverse repo is an opposite contract under which banks can park their excess
cash with the RBI by availing a rate of interest which is called reverse repo rate. Here, when the
banks have excess money for the coming days, they can give it as a loan to the RBI. But here, the
RBI will not give any securities (like Treasury Bills) to them.
Following are the components of the reverse repo transaction:
1. Bank parks its excess cash with the RBI for one day.
2. Such money will be considered as a one day loan by the bank to the RBI.
3. RBI gives an interest rate called reverse repo rate to the bank
Of these two tools (repo rate and reverse repo rate), repo rate is of prime importance because once
repo rate is changed by the RBI, reverse repo also automatically changes by equal percentages in
the same direction.
Repo and reverse repo facilities are available from Monday to Friday. Requests for repo and reverse
repo can be submitted in the morning.

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 Call money market?
The call money market (CMM) the market where overnight (one day) loans can be availed by banks
to meet liquidity. Banks who seeks to avail liquidity approaches the call market as borrowers and the
ones who have excess liquidity participate there as lenders. The CMM is functional from Monday to
Friday. Banks can access CMM to meet their reserve requirements (CRR and SLR) or to cover a
sudden shortfall in cash on any particular day. Effectively, the Call Money Market is the main market
oriented mechanism to meet the liquidity requirements of banks.

Participants
Participants in the call money market are banks and related entities specified by the RBI. Scheduled
commercial banks (excluding RRBs), co-operative banks (other than Land Development Banks) and
Primary Dealers (PDs), are permitted to participate in call/notice money market both as borrowers and
lenders. As per the new regulations, Payment Banks are also allowed to participate in CMM as both
lenders and borrowers.
Banks are the dominant participants in the CMM and hence it is often known as interbank call money
market. Surplus banks will give loans to other banks. Deficit banks that need funds will purchase it.

Functioning of the Call Money Market

Loans are availed through auction/negotiation. The auction is made on interest rate. Highest bidder
(who is ready to give higher interest rate) can avail the loan. Average interest rate in the call market is
called call rate. Dealing in call money is done through the electronic trading platform called Negotiated
Trading System (NDS). This call money rate is an important variable for the RBI to assess the liquidity
situation in the economy. The CMM is known as the most sensitive segment of the financial system.
Since the participants are banks, the call money rate tells about the overall liquidity position in the
economy. Higher call rate indicates liquidity stress in the economy. In this case, the RBI may follow
up with liquidity support measures by through its monetary policy instruments – cutting CRR or
allowing more repos. Hence, the call money rate is taken as the operating target of monetary policy.

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 TRADING AND SETTLEMENT PROCEDURES IN MONEY MARKET
Trading and settlement in the money market involves the buying and selling of short-term debt
instruments. These markets are crucial for liquidity management and are typically
characterized by high liquidity, low risk, and short maturities. Below is an overview of the
trading and settlement process in the money market.

1. Trading in the Money Market

Trading Process:
• Over-the-Counter (OTC) Market: Most money market instruments are traded in the OTC
market, where transactions are conducted directly between parties.
• Negotiation: Prices and terms are negotiated between buyers and sellers, often involving
brokers or dealers.
• Quotations: Dealers quote bid and offer prices, and transactions are executed based on these
quotes.
• Order Types: Orders can be placed as market orders, limit orders, or negotiated orders
depending on the preferences of the trading parties.
2. Settlement in the Money Market
Settlement Mechanisms:
• T+0 (Same-Day Settlement): Common for transactions involving overnight instruments like
call money.
• T+1 (Next-Day Settlement): Standard for most other money market instruments, such as T-
Bills and CDs.
• T+2 (Two-Day Settlement): Sometimes used, but less common in the money market due to
the short-term nature of the instruments.
Settlement Process:
• Clearing: After a trade is executed, the transaction is sent to a clearinghouse (in organized
markets) or directly processed between the two parties in OTC markets. The clearing process
involves confirming the trade details and netting obligations.
• Delivery versus Payment (DvP): This is the most common settlement process, ensuring that
the transfer of securities occurs simultaneously with the payment. This reduces counterparty
risk.
• Payment Systems: Payments are usually processed through real-time gross settlement
(RTGS) systems or other electronic funds transfer systems to ensure quick and secure
transactions.
• Custodial Services: In some cases, a custodian may be involved to hold the securities on
behalf of the buyer, ensuring that the transaction is completed smoothly.

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 MODES OF SETTLEMENT:

Dematerialized Mode: The NSE Clearing follows a T+1 rolling settlement cycle. NSE Clearing
determines the cumulative obligations of each member on the T+1 day, and the data is electronically
transferred to the Clearing Members. All trades concluded during trading are settled on a designated
settlement day (T+1 day).

In case of short deliveries on the T+1 day in the regular segment, NSE Clearing has to conduct a
buy- in auction on the settlement day, and the settlement for the same is completed on the T+2
day. On theother hand, there is a direct closeout in the limited physical market segment.

For arriving at the settlement day, all intervening holidays, including bank holidays, NSE holidays,
Saturdays, and Sundays, are excluded from consideration. The settlement schedule for all the
settlement types is communicated to the market participants widely through the circular issued
during the previous month.

Pay-in and pay-out:

Pay-in is the day when the buyer sends the funds to the stock exchange, and the seller sends the
securities in return. Pay-out is when the stock exchange delivers the funds to the seller and the
shares purchased to the buyer.

What is a bad delivery?

A bad delivery is when shares transfer is not completed because of the lack of compliance with the
exchange norms. The transaction is not fulfilled, abiding by every prospect.

What is a rolling settlement?

A rolling settlement is where the settlement is made in the successive days of the trade. In the
rolling settlement, deals are settled by the second working day. The period excludes Saturday and
Sunday, bank holidays, and exchange holidays. The settlement day is the day when you become the
shareholder of record.

The Settlement Day is significant for those whose interests pertain to earning dividends.

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 Dividends:

The stock must settle down to exhibit transfer of ownership. The settlement date for trade must
be no later than the dividend record date. Since it takes three days for the stock to settle, buyers
who want the dividend must purchase the stock no later than three days before the record date, when
the stock is still selling, or with a dividend. Shares purchased on or after the ex-dividend date don’t
usually receivethe current dividend.

Settlement cycle on the NSE:

NSE Clearing follows a T+1 or T+0 rolling settlement cycle. For all trades executed on the T day, NSE
Clearing determines the provisional cumulative obligations of each member on the T day and
electronically transfers the data to Clearing Members (CMs). All trades concluded during a particular
trading date are settled on a designated settlement day i.e. T+1 or T+0 day. In case of short deliveries
on the T+1 day in the normal segment, NSE Clearing conducts a buy –in auction on the T+1 day itself
and the settlement for the same is completed on the T+2 day, whereas in case of Z/5 settlement type
there is a direct close out. For arriving at the settlement day all intervening holidays, which include
bank holidays, NSE holidays, Saturdays and Sundays are excluded. The settlement schedule for all the
settlement types in the manner explained above is communicated to the market participants vide
circular issued during the previous month.

The cycle for rolling settlements on the National Stock Exchange (NSE) :

Rolling Settlement
In a T+1 rolling settlement, for all trades executed on trading day .i.e. T day the provisional
obligations are determined on the T day, final obligations is generated by 8:30 am on T+1 and
settlement on T+1 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening
holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. A
tabular representation of the settlement cycle for rolling settlement is given below:

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 Activity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+1 working days

Securities and Funds pay out T+1 working days

Valuation Debit T+1 working days

Post Settlement Auction T+1 working days

Auction settlement T+2 working days

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 TERMINAL QUESTIONS

Section A

BL CO

1. Explain the components of Money Market 2 2

2. State the features of Money Market 1 2
3. Explain the objectives of Money Market 2 2
4. Explain the Money Market Instrument 2 2

Section B

BL CO

1. Explain the components and objectives of Money Market 2 2

2. Outline out the trading and settlement procedure in money market. 2 2

Section C

BL CO
Explain the meaning, objectives, features and components of money 2 2
1.
market
2. Describe the trade in money market and its procedure and mode of 2 2
settlement

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 MODULE 3

TRADING IN PRIMARY MARKET

• Meaning of New Issue Market
• Functions of New Issue Market
• Methods of New Issue
IPO
FPO
ASBA
Green Shoe Option
Public Issue
Bonus Issue
Right Issue
Private Placement

MEANING OF NEW ISSUE MARKET

The capital market is divided into two segments: primary and secondary markets. The primary market
is often referred to as the new issue market.
A new issue market is where a stock or bond is being sold to individuals for the first time. This new
issue can either be an Initial Public Offering (IPO) or a new issue floated by an enterprise that has
floated several issues in the past. A market that focuses on these new issues is called the new issue
market.
On the other hand, the secondary market deals with existing shares and bonds. IPO is the process of
offering shares of a private company to the public in a new stock issuance for the first time. Simply
put, the primary market is known as the new issue market because securities are sold for the first time
in this market.

FUNCTIONS OF NEW ISSUE MARKET

1. Organization
It mainly refers to the investigation work, evaluation, and processing of brand-new project proposals.
It inaugurates prior to any issue is come forward in the market. However, the function is performed by
renowned merchant bankers, including all Indian financial institutions, commercial banks, or private
firms. Presently, private organizations and financial institutions also execute this service. As this

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 service is essential, the major success of the issue relies on the market effectiveness to a large extent.

2. Underwriting
It is a necessary covenant whereby the underwriter pledges to subscribes to particular debentures or a
share number or a specific stock amount in the public event not subscribing to the issue. An
Underwriter will not be liable if the issue is completely subscribed. On the contrary, the underwriter
will purchase the shares if a major part of the share issues stays unsold. This is how underwriting is a
serious warranty for share marketability. Institutional such as IDBI, LIC, ICICI, and UTI and the Non-
institutional brokers are examples of two types of Indian underwriters.

2. Distribution and Mechanics of Floating New Issues

Distribution is mainly referred to as the function of the sale of securities to the ultimate investors. Such
a service is executed by the stock market brokers and agents who share daily and direct contact with
the investors.

What are the Advantages of the Primary Market?

Key advantages it offers to both companies and investors.

1. Underwriting
New issues in the primary market are mostly underwritten by investment banks. Underwriting
eliminates the risk of the issue being unsubscribed or undersubscribed. Investment banks and other
financial institutions that underwrite an issue in the primary market ensure that the issue is fully
subscribed by taking on the unsubscribed portion of the issue themselves.

2. Heavily Regulated
Entities issuing securities in the primary market should adhere to several stringent regulatory
requirements laid out by the Securities and Exchange Board of India (SEBI). Such tight regulations
ensure transparency and protect investors’ interests.

3. Enhanced Brand Value and Visibility

Companies that list their securities on the stock exchange after a successful primary market debut often
enjoy enhanced visibility, reputation and recognition. The listed companies can leverage the improved
brand value to access more projects and funding.

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 4. Exit for Initial Investors
The primary market, specifically the IPO market, allows early investors to exit or trim their holdings
in a company by selling their stake to the public. By liquidating their holdings, promoters and initial
investors can realize the gains from their investments.

5. Access to New Investment Opportunities

The primary market can provide investors with access to new investment opportunities that are not
available in the secondary market. Investing early in a company at an attractive valuation can
significantly enhance your returns once the company grows in the future.

What are the Disadvantages of the Primary Market?

While the primary market offers plenty of advantages, it also has its share of disadvantages. Here’s a
quick overview of a few drawbacks.

High Costs
Issuing securities through the primary market can get quite expensive. The issuing entities will have
to incur a wide range of expenses such as underwriting and accounting fees, legal expenses and
regulatory compliance fees, among others.

Overvaluation
Since the pricing of securities offered through the primary market is determined by market sentiment
and demand, they can be overvalued. The inflated prices of securities in the primary market usually go
through a price correction once they are listed in the secondary market, leading to losses for the
investors.

Limited Information
The primary market involves entities that are relatively new and unknown. This makes it harder for
investors to gain access to company information. Apart from the prospectus or the offer document,
there’s not much information surrounding the issuing entity, making it challenging to accurately assess
the prospects and risks.

The Advantages Of New Issue Market?

New issue markets give investors the advantage of investing in a company before it gets listed, among

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 other things. It also allows the company to raise capital with high liquidity.
Some of the advantages of the new issue market are –
• Raises Fresh Capital For the Company
• Provides new investment opportunities to the public
Lowers cost of capital for companies

TYPES OF NEW ISSUE MARKET

1. Public Issue or Initial Public Offer (IPO):

Under this method, the company issues a prospectus to the public inviting offers for subscription. The
investors who are interested in the securities apply for the securities they are willing to buy.
Advertisements are also issued in the leading newspapers. Under the Company Act it is obligatory for
a public limited company to issue a prospectus or file a statement in lieu of prospectus with the
Registrar of Companies. Once subscriptions are received, the company makes allotment of securities
keeping in view the prescribed requirements. The prospectus must be drafted and issued in accordance
with the provisions of the Companies Act and the guidelines of SEBI. Otherwise it may lead to civil
and criminal liabilities.

Public issue or direct selling of securities is the most common method of selling new issues of
securities. This method enables a company to raise funds from a large number of investors widely
scattered throughout the country. This method ensures a wider distribution of securities thereby leading
to diffusion of ownership and avoids concentration of economic power in a few hands.
However, this method is quite cumbersome involving a large number of administrative problems.
Moreover, this method does not guarantee the raising of adequate funds unless the issue is
underwritten. In short, this method is suitable for reputed companies which want to raise large capital
and can bear the large costs of a public issue.

2. Follow on Public Offer

FPO (Follow on Public Offer) is a process by which a company, which is already listed on an exchange,
issues new shares to the investors or the existing shareholders, usually the promoters. FPO is used by
companies to diversify their equity base. A company uses FPO after it has gone through the process of
an IPO and decides to make more of its shares available to the public or to raise capital to expand or
pay off debt.
3. Private Placements
In this strategy, the corporation sells shares to a facilitator at a specified price, & the facilitator

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 then sells these stocks at a higher price to specified investors rather than the broader public.
The issuing firm prepares a prospectus to provide information about its goals and future
prospects so that reputable clients opt to purchase the security through an adviser.

Electronic Initial Public Offering

It is a novel technique of issuing stocks through the stock exchange’s on-line system. For the goal of
receiving applications and placing orders, this firm must select registered brokers.
The firm issuing the security must seek to have its securities listed on any exchange other than the one
where it previously sold its securities.
The manager manages the operations by coordinating them through numerous intermediates involved
in the issue.

Application Supported by Blocked Amount

ASBA or Application Supported by Blocked Amount is a mechanism developed by the Securities &
Exchange Board of India (SEBI) to simplify investing in IPOs. Through this system, the investor
authorizes a Self-Certified Syndicate Bank (SCSB) to block (mark lien) the amount the investor has
used to apply for the IPO. The application money gets debited from the investor's account only if there
is an allotment. If the investor gets an allotment, the money is deducted from the bank account, and
the shares are credited to their Demat account. But, if the investor hasn't got the allotment, the lien is
removed from the account, and the investor can access the funds.

Green Shoe Option

A green shoe option is an over-allotment option. In the context of an initial public offering (IPO), it is
a provision in an underwriting agreement that grants the underwriter the right to sell investors more
shares than initially planned by the issuer if the demand for a security issue proves higher than
expected. A green shoe option was first used by the Green Shoe Manufacturing Company (now part
of Wolverine World Wide, Inc.)Green shoe options typically allow underwriters to sell up to 15%
more shares than the original issue amount. Green shoe options provide price stability and liquidity.
Green shoe options provide buying power to cover short positions if prices fall, without the risk of
having to buy shares if the price rises.

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 6. Rights Issue
A rights issue is a primary market offer to the existing shareholders to buy additional shares of the
company on a pro-rata basis within a specified date at a discounted price than the current market price.
It is important to note that the rights issue offer is an invitation that provides an opportunity for existing
shareholders to increase their shareholding. It is a right that a shareholder may or may not choose to
exercise and not an obligation to buy the shares.
Rights Issue Benefits
The rights issue offers various benefits to the shareholder as well as the company.
Benefits for the company
1. Rights issue is the fastest mode of raising capital for the company.
2. It is a low-cost affair for the company as company can save on the underwriters fees,
advertisement expenses.
3. The confidence of the existing shareholders is retained by making the discounted offer to
existing owners as payback for being part of the company.
4. The company can raise additional funds without increasing the debt burden.
Benefits for the Shareholders
1. Rights issues provide an opportunity for existing shareholders to increase their stake in the
company at a lesser price than the current market price.
2. The rights issue retains the control of the company with existing shareholders when
subscribed by the existing shareholders without renouncing their rights to outsiders.

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 Rights Issue Disadvantages
1. The rights issue would result in dilution in the value of holdings of the existing shareholders.
2. One of the reasons, the company looks to issue rights share is the need for cash on account of
being cash strapped. This may sometimes give a wrong signal to investors that a company is
struggling which may impact the reputation of the company and the share price.
3. The rights issue would increase the number of shares of a company spreading the profit across
that many shares impacting earning per share (EPS).
Types of rights issue
The rights issue can be classified into 4 types:
1. Fully paid rights issue
A fully paid rights issue is where an applicant is required to pay the entire issue amount at the time of
application.
2. Partly paid rights issue
A partly paid rights issue is where an applicant is required to pay only a partial amount at the time of
application. The balance amount is to be paid as and when subsequent calls are made by the company.

7. Bonus Issue:
Bonus shares are complimentary shares that a company issues to its current shareholders. These shares
are distributed free of cost in proportion to the number of shares an investor already owns.
Companies usually issue bonus shares from their accumulated earnings or reserves. This action does
not involve cash transactions but converts a part of the company's retained earnings into share capital.
It's a way for companies to encourage long-term investment without impacting their cash reserves.

Advantages of Bonus Shares to Investors

1. Tax Benefits: Bonus shares are tax exempted. The bonus shares issued and allotted to the investors
are not subject to any tax liability.
2. Long-term Investment: Hence, taken as a case of long-term investment, this is very significant
because it provides more shares without new investment, and hence the profit in selling the share can
be increased.
3. Cost-free: Shares are entirely free and hence enhance the total shareholding of the investor, at the
same time improving the liquidity of the stock.
4. Increasing Trust in the Company: Bonus shares can increase investors' trust in the company and
its management.

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 Advantages of Bonus Shares to Company
1. Added Value: Bonus shares may raise the company's market value and credibility, further
increasing investor confidence.
2. More Free-Floating Shares: Having given away the shares to the investors, its general nature is
that it increases the stock liquidity.
3. Without Dividend payment: Bonus shares are a rewarding way for the shareholders without giving
an outflow of cash.

8. Private placement:
A private placement is a process whereby stocks are sold privately to investors selected beforehand.
In the process, the respective stocks are not put for sale in an open market and are only accessible to
those who have already been chosen based on certain criteria. In comparison to open market
sales, private placement offerings have lesser regulatory requirements.

This group of accredited investors includes wealthy individuals, financial institutions, insurance firms,
etc. Though the private placement program, like the Initial Public Offering (IPO). It involves the
purchase and sale of securities, it does not have stricter rules and regulations related to stock
transactions. It has become a common facet for start-ups that want to raise funds and delay their IPO
in the future.
• Private placement of shares refers to the sale of company shares to the investors and institutions
selected by the company, also called accredited investors.
• The company calls for such investors, which they choose based on certain metrics. They can
be wealthy individuals, financial institutions, etc.
• It is not issued in the open market for the public. Hence, it has fewer regulatory requirements.

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 • It helps diversify fundraising, but finding a suitable investor is difficult. Investors often exhibit
higher demands and charge higher interest rates too.

Types
The process of private placement offering could be better understood by exploring the types of such
distributions found in the market. Preferential allotment and qualified institutional placement are the
two significant types of it.

• Preferential allotment allows the distribution of stocks and bonds to a preferred group of
investors. These accredited individuals and entities include mutual fund companies, financial
institutions, etc.
• On the contrary, qualified institutional placement includes institutional investors that meet the
eligibility criteria per the US regulations.

Features
Despite purchasing shares through an open market is easier for investors, there are a handful of features
that make private placement programs attractive.

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 Primary Market vs. Secondary Market

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 TERMINAL QUESTIONS
Section A

BL CO

1. Explain the functions of new issue market. 2 3

2. Summarize in detail about private placement 2 3
3. Explain the features of IPO 2 3

Section B

BL CO

1. Explain New Issue market? Explain its function. 2 3

2. Explain the different types of New Issue Market. 2 3

Section C

BL CO

1. Explain the functions of New Issue Market. 2 3

2. Discuss the different types of primary market 2 3

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 MODULE-4

TRADING IN SECONDARY MARKET

Meaning of Secondary Market
Role & Functions of Stock Exchange
Listing of Securities
Stock Exchanges in India
Members of Stock Exchange
DEMAT Account
Stock Market Indices

MEANING OF SECONDARY MARKET:

Secondary market refers to a market where securities are traded after being initially offered to the
public in the primary market and/or listed in the stock exchange. majority of the trading is done in the
secondary market and secondary market comprises of equity markets and debt markets.
For the general investor, the secondary market provides an efficient platform for of his securities. for
the management of the company, secondary equity market serves as a monitoring and controller by
facilitating value-enhancing control activities, enabling implementation of incentive -based
management contracts, and aggregating information that guides management decisions.

ROLE AND FUNCTIONS OF STOCK EXCHANGE:

1. Providing liquidity and marketability to existing securities:
The basic function of a stock exchange is the creation of a continuous market where securities are
bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity
and easy marketability to already existing securities in the market.
2. Pricing of securities:
Share prices in a stock exchange are determined by the forces of demand and supply. A stock exchange
is a mechanism of constant valuation through which the prices of securities are determined. Such
valuation provides important instant information to both buyers and sellers in the market. 27 *For
private circulation only

3. Safety of transactions:
The membership of a stock exchange is well regulated and its dealings are well defined according to
the existing legal framework. This ensures that the investing public gets a safe and fair deal on the
market.

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 4. Contributes to economic growth:
Stock exchange is a market in which existing securities are resold and traded. Through this process of
disinvestment and reinvestment savings get channelized into the most productive investment avenues.
This leads to capital formation and economic growth.
5. Spreading of equity cult:
The stock exchange can play a vital role in ensuring wider share ownership by regulating new issues,
better trading practices and taking effective steps in educating the public about investments.
6. Providing scope for speculation:
The stock exchange provides sufficient scope within the provisions of law for speculative activity in a
restricted and controller manner. It is generally adopted that a certain degree of healthy speculation is
necessary to ensure liquidity and price continuity to the stock market.
7. Helpful in raising new capital:
Secondary markets create additional economic value by allowing more beneficial transactions to occur
and create a fair value of an asset. It also provides liquidity to the economy as sellers can sell quickly
and easily due to a large number of buyers in the market.

8. Listing of securities:
It enables a company to raise capital while strengthening its structure and reputation. It provides
liquidity to investors and ensure effective monitoring of compliance of the issuer and trading of the
securities in the interest of the investors. 28 *For private circulation only

LISTING OF SECURITIES:
Listing means formal admission of a security to trading platform of the exchange. It provides liquidity
to the investors without compromising the need of the issuer for capital and effective monitoring of
conduct of the issuer and trading of the securities in the interest of the investors.
A company, desirous of listing its securities on the exchange, shall be required to file an application,
in the prescribed form, with the exchange before issue of prospectus by the company, where the
securities are issued by way of a prospectus or before issue of “offer for sale”, where the securities are
issued by way of an offer for sale. The company shall be responsible to follow all the requirements
specified in the companies act, the listing norms issued by SEBI from time to time and such other
conditions.

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 STOCK EXCHANGE IN INDIA:

1. Bombay stock exchange

It is the leading and oldest stock exchange in India, established in the year 1875. It is the first Asia’s
stock exchange over the past 145 years. It has facilitated the growth of India’s corporate sector by
providing an efficient capital raising platform.
Bombay stock exchange provides an efficient and transparent market foe trading in equity that
instruments like derivatives, mutual funds and also platform for trading (small and medium enterprises)
Vision of Bombay stock exchange:
Emerge has the premier Indian stock exchange with best global practice in technology product
innovation and customer service.

Objectives of Bombay stock exchange:

1. To protect interest of investors.
2. To establish and provide honorable practice to securities transactions.
3. To promote develop and maintain well regulated market in securities.
4. To promote industrial development.

Features of Bombay stock exchange:

1. It is the oldest stock exchange in India of 1875.
2. It is located at Dalal street Mumbai in India.
3. It is the first stock exchange in the country which obtain permanent recognition from government
of India under the securities contract act 1956.
4. It was established as the negative share and stock brokers association in 1875.
5. It has two of world best exchange that is

BOMBAY STOCK EXCHANGE ONLINE TRADING (BOLT)

It came into existence in the year March 14 1995. It facilitates online screen based trading in securities,
it is currently operating over 359 cities in India. It enables the investors anywhere in the world to trade
or exchange based on internet on the BSE platform.

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 2. National stock exchange
In November 1992 on the recommendation of high-powered study group. On the establishment of new
stock exchange report to the Government of India provides the way for the promotion of National stock
exchange across the country.

Vision of NSE
To continue to be a leader, it establishes global presence, facilitate the financial well-being of the
people.
Purpose of NSE:
Committed to improve the financial well being of the people.
Promoters of NSE:
1. Industrial Development Bank of India
2. Industrial Finance Corporation of India
3. Life Insurance Corporation of India
4. State Bank of India 30 *For private circulation only
5. Industrial Credit investment Corporation of India
6. Canara Bank
7. Bank of Baroda
8. General Insurance Corporation
9. Punjab National Bank

Features of NSE:
1. It is owned by the group of leading financial institution.
2. Only qualified traders are involved in securities trading.
3. It is one of the few exchanges in the world trading all types of securities in a single platform.
4. It provides its client fully electronic trading platform.

Objectives of NSE:
1. Establishing nationwide trading facility for equity debt instruments.
2. Ensuring equal access to the investor all over the country through a network.
3. Providing a fair, efficient and transparent security market through the electronic trading system to
the investors.
4. Enabling shorter settlement cycles and book entry settlement systems.
5. To meet the current international standard of security market.

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 3. OTCEI (Over the Counter Exchange of India):

The OTCEI was incorporated in October 1990 as a company under the companies act 1956. It became
fully operational in 1992 with the opening of a counter at Mumbai.
Over the counter means trading across the country, the counter refers to the location of the member or
dealer where the deal or trade takes place.
The member should have the computer and telecommunication facility.

SEBI (SECURITIES EXCHANGE BOARD OF INDIA):

It was established in the year 1988 and given the statutory powers on 12th April 1992 with the SEBI
act 1992 by the Indian parliament. 31 *For private circulation only

Structure of SEBI:
It consists of 9 members
1. One Chairman of the board who is appointed by the Central Government of India
2. One Board member who is appointed by the Central Bank, that is, the RBI
3. Two Board members who are hailing from the Union Ministry of Finance
4. Five Board members who are elected by the Central Government of India

Objectives of SEBI
The primary objective of SEBI is to ensure that the Indian stock market works systematically. Also, it
safeguards the interest of traders and investors by giving them healthy in securities. SEBI even works
on the development of equity markets and ensures that people adhere to the guidelines.
As mentioned above, one of the objectives of its establishment is to assure that no malpractices are
followed in the Indian Capital Market.
Here is a list of the significant objectives of SEBI:
▪ Monitors important acquisition of shares and takeover of companies
▪ Protect the interest of investors
▪ Promoting the development of securities market and regulating the business
▪ It is also involved in research & development so that the stock market is efficient and updated
with the advanced techniques.
▪ It offers a platform for sub-brokers, registrars, stockbrokers, portfolio managers, investment
advisers, bankers, merchant bankers, share transfer agents, trustees of trust deeds, underwriters,
and other associated people to register and regulate work.

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 ▪ They also check that the investors are educated about the intermediaries of the securities market
▪ They also keep a close check that no fraudulent or unfair practices are done related to the
securities market.
▪ It also controls the operations of participants, credit rating agencies, and custodians of
securities, depositories and foreign portfolio investors.

Functions of SEBI
Primarily there are three key functions performed by SEBI:
A. Protective Functions- This function is performed by SEBI to conserve the interest of
investors and financial institutions. Its core protective functions are to check:
1. Price Rigging- The primary purpose of SEBI is to prevent manipulated fluctuations in the
financial market. Swings are the foundation of trade and earn money for tradesmen or investors
in the financial market.
Various people study historical fluctuations on the basis of it numerous theories have also been
made to predict the trend. These theories are called Technical Analysis, and a lot of traders
study them before investing.
Mostly these fluctuations are normally based on the market, but there are times when unusual
variations are made by a group of corporate so that the investors can have a huge loss. These
built-up fluctuations are called price rigging.
Hence, the role of SEBI here is to stop these sudden fluctuations. They have introduced circuits
for doing it; the circuit is a threshold concerning the previous day closing. In case the security
price goes beyond the limit, then the circuit breaker would be used, and trading for that specific
security would be stopped for a couple of hours or a day.
2. Prevent insider trading- This can also be said to be a part to stop price rigging. The stock
price of any company gets immensely affected by any public announcement or news about the
company. There are always some people who are aware of the upcoming news about the
company.
Hence, they can take advantage of this news to buy and sell the company’ security before the
news comes into action. This is termed as insider trading. To prevent this, SEBI has barred
trusts of listed companies and employee welfare schemes so that they cannot purchase their
own shares from the secondary market.
SEBI has also requested these listed companies to unveil their employee benefit schemes which
should include their stock purchase. They should align them as per ESOS and ESPS guidelines.

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 3. Financial education for investors- Another primary role of SEBI is to provide online and
offline seminars or training by multiple means to train the traders and investors. These seminars
include money management and the basics of the financial market.
4. SEBI guidelines- SEBI has made bye-law guidelines so that any unfair practices that can be
used by companies to manipulate security markets can be prevented.
B. Development Functions- The primary function of development functions is providing
training to the intermediaries. Here, SEBI also works on bringing innovation in Indian
Financial Market. Some of the development functions comprise of:
▪ DEMAT Form of securities
▪ IPO is permitted through an exchange
▪ Education of electronic platform for financial market
▪ Information on discount brokerage
▪ Underwriting is optional to lessen the cost of issue
▪ Training for financial intermediaries

The objective of SEBI is to promote fair practices; hence, it educates them about it plus makes the
investors aware of the stock market in depth.

C. Regulatory Functions- In the regulatory functions, SEBI does the monitoring of the functioning
of financial market go-betweens. The implementation of SEBI bye-laws emissaries and corporate is
done. This is a vital step as it ensures that the stock market operates seamlessly with untarnished
transparency.
It is the role of SEBI to formulate guidelines and code of conduct for financial intermediaries and
regulate amalgamations, alliance and takeovers takeover of companies. Some of its regulatory
functions are:
▪ Registering and regulating functions of mutual funds
▪ Regulates takeover of companies
▪ It has to register all share transfer agents, intermediaries, trustees, brokers, sub-brokers and
other people involved with the stock exchange
▪ Conduct inquiries & audit of exchanges
Also, SEBI has the authority to charge a fee on capital market participants. Plus, it also directs the
credit rating agencies.

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 Members of the stock exchanges:

1. Floor brokers
They execute orders for members (brokers) and receive a share in the brokerage commission that a
broker charges to his client.

2. Commission brokers
They execute orders of their customers by buying and selling securities on the exchange. They charge
a specified commission on the purchase or sale value. A commission broker does not buy or sell
securities in his own name. They deal with many clients and consequently with many securities.

3. Jobbers
They are professional independent brokers engaged in buying and selling of specified securities in
their own name. Jobbers cannot deal on behalf of public and are barred from taking commission. They
deal 32 *For private circulation only with brokers who in turn transact on behalf of the public. A jobber
deals in a limited number of securities which he tracks regularly.

4. Tarawaniwalas

A tarawaniwala can act both as a broker and jobber. The tarawaniwala might act against interests of
investors by purchasing securities from them in his own name at a lower price and sell the same
securities to them at higher prices. To prevent this, the securities contract (regulation) act of 1956
provides that a member of a stock exchange can act as a principal only for a member of a recognized
stock exchange.

5. Odd lot dealers

They specialize in buying and selling of securities in odd lots. They buy odd lot units at a lesser price.

6. Badliwalas
They are financiers who facilitated the carry over business by financing carry over business by
financing carry-over transactions. They earn interest for the amount financed (badla).

7. Arbitrageurs
Arbitrageurs keep a close watch on the price of shares in different markets. They buy shares in markets
where their price is low and sells them in markets where their price is high.
For example, if a share of XYZ is quoted at Rs.2000 in Bangalore stock exchange and at Rs.2100 in
Madras stock exchange, the arbitrageur will buy shares in the Bangalore stock exchange and sell them

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 in the Madras stock exchange. He would be earning a profit of Rs.100 per share.

8. Sub-brokers/Remisiers
Sub-brokers are agents of stock brokers. Since they are not members of a stock exchange, he cannot
directly deal in securities, he cannot directly deal in securities. He helps clients to buy and sell securities
only through the stock broker. In the Bombay stock exchange the sub- brokers are termed as
“Remisiers”. 33 *For private circulation only

DEMAT ACCOUNT
A demat account helps investors hold shares and securities in an electronic format. This kind of account
is also called a dematerialized account. It also helps to keep proper track of all the investments an
individual makes in shares, exchange-traded funds, bonds and mutual funds in one place.
Demat accounts are primarily used for investing in share and securities in an electronic form that is
more accessible with a Demat account. Specifically, these accounts are meant to convert share
certificates from physical to electronic format, thereby providing greater accessibility for account
holders.
The difference between a demat and a trading account is that a demat account holds the share and
securities (bonds, ETFs, mutual fund units, etc.) in digital mode, while a trading account provides the
interface to buy and sell shares in the stock market.

Advantages of Demat account:

1. No stamp duty on transfer of securities.
2. Immediate and fast transfer of securities.
3. Elimination of “Bad deliveries”.
4. Elimination of risk by loss, theft, mutilation etc.
5. Faster settlement and disbursement of corporate benefits like bonus, rights, dividends etc.

STOCK MARKET INDICES:

In finance, a stock index or stock market index, is an index that measures a stock market, or a subset
of the stock market, that helps investors compare current stock price levels with past prices to calculate
market performance.
Sensex and nifty are the two most important stock market indices in India. India’s stock markets have
two benchmark indices-BSE Sensex and NSE nifty.

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 S&P BSE Sensex:
Sensex is a blend of the words sensitive and index. It was introduced in 1986 and is the oldest in India.
The BSE Sensex consists of the top 30 largest and most frequently traded stocks listed in the Bombay
stock exchange (BSE). 34 *For private circulation only

CNX NIFTY (NIFTY 50):

Also known as the NSE Nifty, this share market index consists of the top 50 largest and most frequently
traded stocks within the NSE. First created in 1996, NSE NIFTY is owned and maintained by India
index services and products limited (IISL), which is a joint-venture organization between CRISIL and
NSE.

TERMINAL QUESTIONS
Section A

BL CO

1. Explain the role and functions of stock exchange. 2 4

2. Explain the concept listing of securities. 2 4
3. Distinguish between NSE and BSE 4 4
4. Outline the objectives of SEBI? 2 4
5. Explain about the stock market indices. 2 4

Section B

BL CO

1. Explain the members involved in the stock exchange. 2 4

2. Outline the features of online DEMAT account 2 4

Section C

BL CO

1. Explain the different stock exchanges in India 2 4

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 MODEL QUESTION PAPER

FUNDAMENTALS OF TRADING IN STOCK AND CURRENCIES

TIME: 03 HOURS Maximum Marks: 50

SECTION – A
7. Answer any FOUR of the following questions. 4*5=20

BL CO

2. Illustrate the components of Financial System. 3 1

3. Explain the different components of Money Market. 2 1
4. Explain the functions of New Issue Market. 2 2
5. Distinguish between NSE and BSE 4 3
6. Outline any two types of new issue market. 3 4

SECTION – B
2. Answer any TWO of the following questions. 2 x 9 = 18

BL CO

1. Explain the role of financial system in economic development 2 1

2. State the different types of New Issue Market and explain in detail. 1 2
3. Explain the members involved in the stock exchange 2 3

SECTION – C

3. Answer the following question. (COMPULSORY) 1 x 12 = 12

BL CO

1. Explain the different stock exchanges in India 2 4

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