Financial Markets Test - 6

Working capital financing is done by various modes such as trade credit, cash and discount of bills, bank guarantee, letter of credit, factoring, commercial paper, working capital financing extensively used by all small and big businesses.

Commercial bills : A bills of exchange issued by a company (a trade bill) or accepted by a bank (a bank bill), as opposed to a Treasury bill, which is issued by the government.

An ideal capital market is defined by a set of five assumptions.

1: capital markets are frictionless

2: All market participants share homogenous expectation, valuerelevant information is costlessly available to all market participants.

3: All market participants are atomistic. No single market participant can affect the market price of a security via trades.

4: The firm’s investment program is fixed and known.

5: The firm’s financing is fixed. Once chosen, the firm’s capital structure is fixed.

The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year.

Only institutional investors can participate in money market. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to thirteen months.

There are various methods of floating new issues in the primary market:

(i) Offer Through Prospectus This involves inviting subscription from the public through issue of prospectus.

(ii) Offer for Sale Under this method securities are not issued directly to the public but offered for sale through intermediaries like issuing houses or stock brokers.

(iii) Private Placement Private placement is the allotment of securities by a company to institutional investors and some selected individuals.

(iv) Rights Issue This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company.

(v) e-IPOs A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange.

A rights issue is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a non-dilutive pro rata way to raise capital.

A private placement is the sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds.

In India, shares and securities are held electronically in a dematerialized (Demat) account, instead of the investor taking physical possession of certificates. A Demat account is opened by the investor while registering with an investment broker (or sub-broker).

One is the National Securities Depository Limited (NSDL) and the other is the Central Depository Service (India) Limited (CDSL). Every Depository Participant (DP) needs to be registered under this Depository before it begins its operation or trade in the market.