Financial Markets
Financial markets mobilise savings and channel them into investment. This domain tests money market versus capital market, primary versus secondary market, issue methods and SEBI's role.
Classification
- Money market (up to one year): call money, treasury bills, commercial paper, certificate of deposit, commercial bills.
- Capital market (long term): equity shares, preference shares, debentures, bonds.
Primary market methods
Offer through prospectus, offer for sale, private placement, rights issue, e-IPO. A rights issue is offered first to existing shareholders, usually at a discount.
Secondary market
A stock exchange provides liquidity, price discovery, safety of transactions and contributes to capital formation. SEBI is the regulator: it protects investors, regulates intermediaries, promotes market development and prohibits unfair trade practices.
Worked example
A company with 5 crore existing shares raises ₹200 crore by offering one new share for every two held at ₹80. Reasoning: this is a rights issue in the primary market, because new securities are created and offered to existing holders. Once those shares trade on the NSE, the activity is in the secondary market. Buying a 91-day treasury bill instead would be a money-market transaction.
Traps that cost marks
Calling a rights issue a secondary-market activity; treating SEBI as a bank or as a stock exchange; mixing commercial paper (an unsecured money-market promissory note) with a debenture (long-term capital-market instrument).