2 - Financial Markets.pptx

7/21/2019 2 - Financial Markets.pptx

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Primary Markets


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Financial MarketsFinancial markets perform the essential

function of channeling funds from economicplayers that have saved surplus funds to

those that have a shortage of fundsAt any point in time in an economy, there are

individuals or organizations with excessamounts of funds, and others with a lack of

funds they need for example to consume or toinvest.

The rst group is commonly referred to aslenders, the second group is commonly

referred to as the orrowers of funds.


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Functions of Financial marketsBorrowing and Lending

Financial markets channel funds from households, rms,governments and foreigners that have saved surplusfunds to those who encounter a shortage of funds !forpurposes of consumption and investment"

Price Determination

Financial markets determine the prices of nancialassets. The secondary market herein plays an importantrole in determining the prices for newly issued assets


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Functions of Financial marketsCoordination and Provision of Information

The exchange of funds is characterized y a high amount ofincomplete and asymmetric information. Financial marketscollect and provide much information to facilitate thisexchange.

Risk Sharing

Trade in nancial markets is partly motivated y the transfer ofrisk from orrowers to lenders who use the otained funds toinvest


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Functions of Financial marketsLiquidity

The existence of nancial markets enales the owners ofassets to uy and resell these assets. #enerally thisleads to an increase in the li$uidity of these nancialinstruments

Eciency

The facilitation of nancial transactions through nancialmarkets lead to a decrease in informational cost andtransaction costs, which from an economic point of view

leads to an increase in e%ciency.


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The &rimary and 'econdaryMarkets

ThePrimary marketis the market whereinvestors purchase newly issued securities. Initia! "u#!ic o$ering %IP&'( An initial pulic o(er

occurs when a company o(ers stock for sale to the pulicfor the rst time.

TheSecondary market is the market where

investors trade previously issued securities. Aninvestor can trade)*irectly with other investors.

+ndirectly through a roker who arranges transactions forothers.

*irectly with a dealer who uys and sells securities from


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&rimary Market

+t is that market in which shares, deentures

and other securities are sold for the rst time

for collecting longterm capital.This market is concerned with new issues.

Therefore, the primary market is also called

-/ +''0 MA12T.


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n nvo ves severasteps4ompany appoints investment anking rm to

arrange nancing.

+nvestment anker designs the stock issue andarranges for xed commitment or est e(ortunderwriting.

4ompany prepares a prospectus !usually withoutside help" and sumits it to the 'ecurities andxchange 4ommission !'4" for approval.

+nvestment anker circulates preliminaryprospectus !red herring".

0pon otaining '4 approval, company nalizesprospectus.

0nderwriters place announcements !tomstones"


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Features

+t +s 1elated /ith -ew +ssues

+t 5as -o &articular &lace

+t 5as 6arious Methods 3f Float 4apital)

Following are the methods of raising capital inthe primary market)

i" &ulic +ssue

ii" 3(er For 'ale

iii" &rivate &lacement

iv" 1ight +ssue

v" lectronic+nitial &ulic 3(er

+t comes efore 'econdary Market


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37ectives

To promote a new company

To expand an existing company

To diversify the production

To meet the regular working capital

re$uirements

To capitalize the reserves


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3rigination

3rigination refers to the investigation andanalysis and

processing of new issue proposals. 3ne aspect

is thepreliminary investigation, entailing a careful

study of the

technical, economic, nancial and legal aspects

of theissuer to ensure that the issue is a sound one.To improve

the $uality of the capital issue, the sponsor also

renders


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0nder /riting

0nderwriting is a form of institutionalguarantee that

the issue would e sold y eliminating the risk

arisingfrom uncertainty of pulic response.*istriution

The sale of securities to the ultimate investorsis known

as distriution.


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+ssue Mechanism

PR&SPEC)*S+P*BLIC ISS*E

0nder the prospectus9pulic issue method,

issuing companies o(er directly to the generalpulic, through a prospectus, a xed numer

of shares, at a stated !par9premium" price. To

ensure success, issues are generally

underwritten, +t is, however, an expensive

method and is, therefore, suitale only for

lar er issues


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+ssue MechanismPL,CEME-)S

0nder the placement method, the entire lock of securities

is o(ered to a select group of investors. +t is an inexpensive

method and the success of an issue does not depend upon

pulic response. 'ecurities can e sold through this method

even at times when conditions in the market may not e

favorale. +t is arranged through a merchant anker, an

agent

of issuers, who rings together the issuers and investor!s".

'ecurities o(ered are exempt from pulic disclosers

regulations and registration re$uirements of the regulatory

ody.


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&rivate &lacement vs &ulic+ssuesPrivate Placement Public Issues

1. Issues are offered to matureand sophisticated institutionalinvestors.

2. No discloser requirements.3. Issues are not screened and

this increases the risk.

1. Issues are primarily offered toretail investors.

2. Discloser requirement isthere.

3. All issues are screened.


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+ssue Mechanism

RI./)S ISS*ES

The existing shareholders are o(ered the

right to suscrie to new shares in proportion

to the numer of shares held in the issuing

company in rights issues. This method can e

used only y existing companies


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+ssue Mechanism

&00ER 0&R S,LE

The 3(er for sale method involveso(ering9sale of shares y the existing holders

!promoters" to dilute their holdings in existingcompanies.

B&&1 B*ILDI-.

The ook uilding method is a volume andprice discovery method. The investors $uotethe numer of securities and the price atwhich they wish to ac$uire them.


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Methods of &ricing

Fixed &rice

:ook :uilding


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Fixed &rice

+n the xedprice issue method, the issuer xes the

issue

price well efore the actual issue. For this very

reason, it iscautious and conservativein pricing the issue so

that the

issue is fully suscried. 0nderwriters also do not

like the

issue to devolve on them and hence favours

conservative

pricing of the issue. For these practical reasons, the


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:ook :uilding:ookuilding is a process of price discovery used in pulic

o(ers. The issuer sets a 8oor price and a andwithin which

the investor is allowed to id for shares.

The upper price of the and can e a maximum of days

3nly electronic idding is permitted

:idding demand is displayed at the end of every day.

The lead manager analyses the demand generated and

determines the issue price or cuto( price in consultation

with the issuer.


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4ut 3( &rice

The cuto( price is the price discovered y

the market. +t is the price at which the shares

are issued to the investors.

+nvestors idding at a price elow the cuto(

price are ignored.


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xample

?et;s say a company wants to issue


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xample

At 1s>>, on the asis of ids received,the investors are ready to uy=,@@,@@@ shares. 'o the cuto( price

can not e set at 1s. >> as only = lakhsshares will e sold.

'o as a next step, the price is lowered

to 1s. > At 1s. >, investors are readyto uy lakhs shares. 'o if the cuto(price is set at 1s. >, C lakhs

shares will e sold. This still leaves lakhs shares to e sold.


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xample

The price is now lowered to 1s. >D. At1s. >D, investors are ready to uy lakhs shares. -ow if the cuto( price is

set at 1s>D, all > and 1s. > will also e issuedshares at 1s. >D.


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'econdary MarketThe secondary market is that market in which the

uying and selling of the previously issued securities isdone.

The transactions of the secondary market are generally

done through the medium of stock exchange.The chief purpose of the secondary market is to create

li$uidity in securities.

+f an individual has ought some security and he now

wants to sell it, he can do so through the medium of

stock exchange to sell or purchase through the mediumof stock exchange re$uires the services of the rokerpresently, their are = stock exchange in +ndia.

2 - Financial Markets.pptx

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