Ch-2 Investment Environment

8/7/2019 Ch-2 Investment Environment

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To run business and for some long term

purpose organization required more

money for merger & acquisition etc.Government must borrow large amount

of money to provide the goods and

services that the people demand of them.

So funds can be obtained in three ways:Banks, financial markets, private

placements.


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A financial market is a market forcreation and exchange of financial assets( securities).

The two key financial market are theMoney market and Capital market.

Money market are markets for short term,high quality debt securities.

The capital market is the market for longterm securities. It has longer maturity sorisk is also high.


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Financial markets can be divided into

Primary and secondary market.

Aprimary market is one in which aborrower issues new securities in

exchange for cash from an investor. New

sales of treasury bills or stocks take place

in primary market. It is called IPO.


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When the original purchaser sells their

securities they trade in secondary

market.Financial market can also be divided into

Organized and OTC markets.


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The money market exists as a result of

the interaction between the suppliers

and demanders of short term funds.The money market are associated with

the issuance and trading of short term

debt obligations of large corporations

and governments.


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Short term debt instruments ( Maturity of

less than 1 year).

Services immediate cash needs:Borrowers need short term working

capital & lender needs interest for their

excess cash.


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Low risk

Transaction cost are low

Liquid market provides easy entry andexit.


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The capital markets are the markets in

equity and long term debts ( bonds) are

traded. In other words, the markets forlong term capital.

Capital market can be further divided

into primary and secondary market.

In the primary market, securities areoffered to public for subscription for the

purpose of raising capital.


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A dealer market is one where dealers

post bid rates ( Buy rates) and offer rates

( sale rates) at which public investors cantrade.


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NSE was promoted by leading financial

institutions and the government of India

was incorporated in November 1992.OTCEI which allows listing of small and

medium sized companies. The

regulatory agency which oversees the

functioning of stock market is the SEBI.


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Sensex BSE 30 stocks- base value is

100

Nifty- base value 1000- 23 sectors of theeconomy.


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Treasury Bill: these are short term

obligations issued by the government. At

present, the GOI issues 4 types of T-billsi.e 14day, 91 days, 182 days and 364 days.

T- bills are issued for a minimum of

Rs.25,000/-

Call Money: these are short term fundstransferred between financial institutions

usually for no more than one day.


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The money which lent for one day in call

money market is known as overnight

moneyThe maturity period of call loans vary

from 1 to 14 days.


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It is an agreement, which involves a saleof a security with an undertaking to buyback the same security at a

predetermined price and at a future date.A party sells treasury securities but

agrees to buy them back at a certain date( 3-14 days) for a certain price.

The transaction is called repo from thepoint of seller and reverse repo from thepoint of buyer of the security.


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It is a short term loan.


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These are short term unsecured

promissory notes issued by a company to

raise short term cash. They mature in nomore than 270 days.

Only the largest companies issue these

commercial papers.

Generally companies prefer to issue CP when they feel that rate of interest by

bank is higher than CP.


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These are time drafts payable to a seller

of goods, with payment guaranteed by a

bank.Bankers acceptance is essentially a post

dated check on which a bank has

guaranteed payment.

These are commonly used to financeinternational trade transactions.


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Shares

Bonds


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Derivatives are financial instruments that

have no intrinsic value, but derive their

value from something else.There are two types of derivative

securities that are of interest to most

investors FUTURE & OPTION.

Future contract is an agreement enteredbetween two parties to buy or sell an

asset at a future date for an agreed price.


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Option is the right but not the obligation

of the holder, to buy or sell underlying

asset by a certain date at a certain price.There are two types of options: Call

option and put option

Call option is a contract that gives the

owner the right, but not obligation to buythe underlying asset by a specific date at

a specified price.


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Put option is a contract that gives the

owner the right, but not obligation to sell

the underlying asset by a specified dateat a specified price.


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Financial intermediaries channel the

savings of individuals, businesses and

government into loans or investments.Banks.


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Ch-2 Investment Environment

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