By following course

outline and class lecture,

I am able to make almost
all slides of Kismot sirs
course

 Have a good exam

Abdullah al faisal
Dept of finance
University of Dhaka
Id 20-064

 Learning Objectives

To understand the functions performed and the roles played by the

system of financial markets and financial institutions in the global
economy and in our daily lives.
To discover how important the financial system is to increasing our
standard of living, generating new jobs, and building our savings to
meet tomorrows financial needs.

Introduction to the Financial System

The financial system is

the collection of markets, institutions, laws, regulations, and

techniques
through which bonds, stocks, and other securities are traded,
interest rates are determined, and financial services are
produced and delivered around the world.

Introduction to the Financial System

The primary task of the financial system is

to move scarce loanable funds
from those who save
to those who borrow to buy goods and services and to make
investments in new equipment and facilities,
so that the global economy can grow and the standard of living can
increase.

Flows within the Global Economic System

The basic function of the economic system is to allocate scarce

resources land, labor, management skill, and capital to produce the
goods and services needed by society.
The global economy generates a flow of production in return for a flow
of payments.
The circular flow of production and income is interdependent and
never ending.

Circular Flow of Income, Payments, and Production

in the Global Economic System

Producing units
(mainly business firms
and governments)

Consuming units
(mainly households)

The Role of Markets in the Global Economic System

Most economies around the world rely principally upon markets to

carry out the complex task of allocating scarce resources.
The marketplace is dynamic. It determines what goods and services
will be produced and in what quantities through their prices.
Markets also distribute income by rewarding superior producers with
increased profits, higher wages, and other economic benefits.

Types of Markets

There are essentially three types of markets within the global

economic system.
The factor markets allocate factors of production (land, labor, skills,
capital) and distribute income (wages, rent) to the owners of
productive resources.
Consuming units use most of their income from factor markets to
purchase goods and services in the product markets.

Types of Markets

The financial markets channel savings to those individuals and

institutions needing more funds for spending than are provided by
their current incomes.

Types of Markets
Product markets

Financial markets
Producing units
(mainly business
firms and
governments)

Flow of funds
(savings)
Flow of financial
services, income, and
financial claims

Factor markets

Consuming units
(mainly households)

The Financial Markets and the Financial System:

Channel for Savings and Investment

Nature of savings
Households: current income tax payments consumption expenditures
Businesses: retained earnings
Governments: current revenues expenditures

Nature of investment
Households: purchase of a home
Businesses: expenditures on capital goods and inventories
Governments: building/maintaining public facilities

The Financial Markets and the Financial System:

Channel for Savings and Investment

The financial markets enable the exchange of current income for future
income and the transformation of savings into investment so that
production, employment, and income can grow, and living standards
can improve.
The suppliers of funds to the financial system expect not only to
recover their original funds but also to earn additional income as a
reward for waiting and assuming risk.

The Global Financial System

Demanders
of funds
(mainly
business
firms and
governments)

Flow of loanable funds

(savings)
Flow of financial
services, incomes, and
financial claims

Suppliers of
funds
(mainly
households)

Functions Performed by the Global Financial System and

the Financial Markets

Savings function. The global system of financial markets and

institutions provides a conduit for the publics savings.
Wealth function. The financial instruments sold in the money and
capital markets provide an excellent way to store wealth.
Liquidity function. Financial markets provide liquidity for savers who
hold financial instruments but are in need of money.

 Financial vs Physical Assets

Financial assets are intangible, physical assets, on the other hand, are tangible. Both assets
represent value that can be converted into cash.

Financial assets lose value due to changes in market yields and other market price fluctuations,
whereas physical assets lose value due to depreciation, wear and tear.
Physical assets can be depreciated over their useful life, while financial assets can be revalued.
physical assets are disposed off when they served for their useful economic life, but financial assets
are redeemed when they mature.
Financial assets are recognized at fair value (present value of future cash flow), while physical assets
are recognized at cost.
Financial assets may yield cash flows of return during the time that they are held and a final receipt
on the assets face value. Physical assets, on the other hand, may receive such cash flows in terms of
rent or may contribute to increased earnings through the use in the production or increase in market
value at the point of sale.
Financial assets do not require additional costs to keep them functional, but physical assets may
need to be repaired, maintained and upgraded from time to time.

Functions Performed by the Global Financial System and

the Financial Markets

Credit function. Global financial markets furnish credit to finance

consumption and investment spending.
Payments function. The global financial system provides a mechanism
for making payments for goods and services, in the form of currency,
checking accounts, debit cards, credit cards, digital cash, etc.

Functions Performed by the Global Financial System and

the Financial Markets

Risk protection function. The financial markets offer protection against

life, health, property, and income risks, by permitting individuals and
institutions to engage in both risk-sharing and risk reduction.
Policy function. The financial markets are a channel through which
governments may attempt to stabilize the economy and avoid
inflation.

Functions Performed by the Global Financial System and

the Financial Markets

The financial services that are most widely sought by the public
include:

Payments services
Thrift services
Insurance services
Credit services
Hedging services
Agency services

 a security is a tradable financial asset of any kind.[1]

Securities are broadly categorized into:
debt securities, (e.g., commercial paper, bonds and debentures)
equity securities, (e.g., common stocks)
Hybrid securities(preferred stock)
derivatives, (e.g., forwards, futures, options and swaps).
The company or other entity issuing the security is called the issuer.

 Debt[edit]
Debt securities may be
called debentures, bonds, deposits or commercial paper depending
on their maturity and certain other characteristics.
The holder of a debt security is typically entitled to the payment of
principal and interest, together with other contractual rights under
the terms of the issue, such as the right to receive certain
information.
Corporate bonds represent the debt of commercial or industrial
entities. Debentures have a long maturity, typically at least ten years,
whereas notes have a shorter maturity. Commercial paper is a simple
form of debt security that essentially represents a post-dated cheque
with a maturity of not more than 270 days.

Bond vs Deventure:
Bonds are more secure than debentures, but the rate of
interest is lower
Debentures are unsecured loans but carries a higher rate of
interest
In bankruptcy, bondholders are paid first, but liability
towards debenture holders is less
Debenture holders get periodical interest
Bond holders receive accrued payment upon completion of
the term
Bonds are more secure as they are mostly issued by
government firms

Debt vs Equity:
An equity security is a share of equity interest in an entity such as the
capital stock of a company, trust or partnership.
The most common form of equity interest is common stock. The
holder of an equity is a shareholder, owning a share, or fractional
part of the issuer. Unlike debt securities, which typically require
regular payments (interest) to the holder, equity securities are not
entitled to any payment. In bankruptcy, they share only in the
residual interest of the issuer after all obligations have been paid out
to creditors.. Equity also enjoys the right to profits and capital gain,
whereas holders of debt securities receive only interest and
repayment of principal regardless of how well the issuer performs
financially. Furthermore, debt securities do not have voting rights
outside of bankruptcy. In other words, equity holders are entitled to
the "upside" of the business and to control the business.

 Hybrid[edit]
Hybrid securities combine some of the characteristics of both debt
and equity securities.
Preference shares form an intermediate class of security between
equities and debt. If the issuer is liquidated, they carry the right to
receive interest and/or a return of capital in priority to ordinary
shareholders. However, from a legal perspective, they are capital
stock and therefore may entitle holders to some degree of control
depending on whether they contain voting rights.

Im assuming this is a very basic question and hence answering it in a simple way.
The basic difference between swaps and futures or options is that a swap involves a
series of payments in the future, whereas options or futures have only one
transaction at exercise/expiry. And also, swaps are usually OTC (Over-the-counter)

Futures
Futures are an obligation.
You agree that after time T, you will pay $K to buy X.

Currently onions are selling at $4 per kg. You are sure that due to bad weather, the prices
might go up after 3 months and thats when youll need a lot of onions for your wedding.
So you enter into a contract with me to buy 20kg onions at $4 (K) per kg after 3 months (T).
Now after 3 months, the price of onions is either $6 or $2 per kg. In any case you pay me $4
per kg (because we entered into a futures contract) and I deliver 20kg onions to you.
If the current price is $6, you have saved$2 per kg or $40 overall.
If the current price is $2, you have lost $2 per kg or $40 overall.
Thus, a futures contract is a linear contract. For every $1 price movement of onion, you make
or lose $1 per unit.

Options
Options are a right, not an obligation: You agree that after time T, you will pay K to
buy X only if you feel like it. And for this privilege you pay a small premium p
now.
You bought a new car. Youre pretty sure youre a good driver and will keep the car
safe. However, in case of an accident by your wife, you dont want to end up
paying for all the damages. So you go to an insurance company. You agree that for
1 year (T), the insurance company will cover any damages over $2000 (K). And for
this service, you pay them a premium of $50 (p)
Now if you have an accident-free year, you've lost your $50 premium. In case of an
accident with damages for $5000, you pay $2000 and the company pays $3000,
saving you that amount (minus $50, of course)
Thus, options are non-linear instruments. You can only lose the premium, but
make a lot of money.
.

 Swaps

In a swap, two parties enter into a contract to exchange

cash-flows based on certain financial parameters.
Suppose you own an apple tree and I own a mango tree. You
wont eat more than 5 kg of apples a month, so we enter
into an agreement. Every month, youll give me any apple
produce over 5kg and in return, Ill give you 3 kg of mangoes.
In the financial world, swaps are usually determined by
floating interest rate, foreign exchange rate, equity price, or
commodity price. The common kinds of swaps are interestrate, currency, commodity, credit-default swaps etc

On basis of maturity of claims

The money market is for short-term (one year or less) loans, while
the capital market finances long-term investments by businesses,
governments, and households.
In particular, governments borrow from commercial banks in the
money market, while in the capital market, insurance companies,
mutual funds, security dealers, and pension funds supply the funds
for businesses.
The money market may be subdivided into Treasury bills, certificates
of deposit (CDs), bankers acceptances, commercial paper, federal
funds and Eurocurrencies.
The capital market may be subdivided into mortgage loans, taxexempt (municipal) bonds, consumer loans, Eurobonds and
Euronotes, corporate stock, and corporate notes and bonds.

Money Market Securities

Have maturities within one year
Are issued by corporations and governments to
obtain short-term funds
Are commonly purchased by corporations and
government agencies that have funds available
for a short-term period
Provide liquidity to investors
Good for net working capital
Sold in discount

29

Money Market Securities (contd)

Treasury bills:
Are issued by the BdTreasury
Are sold weekly through an auction
Have a par value of $1,000
Are attractive to investors because they are backed by the
federal government and are free of default risk
Are liquid
Can be sold in the secondary market through government
security dealers

30

Money Market Securities (contd)

Treasury bills (contd)
Investors in Treasury bills
Depository institutions because T-bills can be easily liquidated
Other financial institutions in case cash outflows exceed cash
inflows
Individuals with substantial savings for liquidity purposes
Corporations to have easy access to funding for unanticipated
expenses

31

Money Market Securities (contd)

Commercial paper:
Is a short-term debt instrument issued by well-known, creditworthy
firms blue chip firms
Is typically unsecured
Is issued to provide liquidity to finance a firms investment in
inventory and accounts receivable
Is an alternative to short-term bank loans
Has a minimum denomination of $100,000
Has a typical maturity between 20 and 270 days in bd 90 or 180 days
Has no active secondary market
Is typically not purchased directly by individual investors

NB: no commercial paper in bd

32

Money Market Securities (contd)

Commercial paper (contd)
Ratings
The risk of default depends on the issuers financial condition and
cash flow
Commercial paper rating serves as an indicator of the potential
risk of default
Corporations can more easily place commercial paper that is
assigned a top-tier rating
Junk commercial paper is rated low or not rated at all

33

Money Market Securities (contd)

Negotiable certificates of deposit (NCDs):
Are issued by large commercial banks and other
depository institutions as a short-term source of funds
Have a minimum denomination of $100,000
Are often purchased by nonfinancial corporations
Are sometimes purchased by money market funds
Have a typical maturity between two weeks and one year
Have a secondary market

34

Money Market Securities (contd)

Repurchase agreements (contd)
Placement
Repo transactions are negotiated through a telecommunications
network with dealers and repo brokers
When a borrowing firm can find a counterparty to a repo
transaction, it avoids the transaction fee
Some companies use in-house departments

Estimating the yield

The repo yield is determined by the difference between the initial
selling price and the repurchase price, annualized with a 360-day
year

35

Money Market Securities (contd)

Federal funds

The federal funds market allows depository institutions to

lend or borrow short-term funds from each other at the
federal funds rate
The rate is influenced by the supply and demand for funds in the
federal funds market
The Fed adjusts the amount of funds in depository institutions to
influence the rate
All firms monitor the fed funds rate because the Fed manipulates
it to affect economic conditions
The fed funds rate is typically slightly higher than the T-bill rate

36

Money Market Securities (contd)

Bankers acceptances:

Indicate that a bank accepts responsibility for a future

payments
Are commonly used for international trade transactions

An unknown importers bank may serve as the guarantor

Exporters frequently sell an acceptance before the payment date

Have a return equal to the difference between the

discounted price paid and the amount to be received in the
future
Have an active secondary market facilitated by dealers

37

Money Market Securities (contd)

Bankers acceptances (contd)

Steps involved in bankers acceptances

First, the U.S. importer places a purchase order for goods
The importer asks its bank to issue a letter of credit (L/C) on its
behalf
Represents a commitment by that bank to back the payment owed to
the foreign exporter

The L/C is presented to the exporters bank

The exporter sends the goods to the importer and the shipping
documents to its bank
The shipping documents are passed along to the importers bank

38

Sequence of Steps in the Creation

of A Bankers Acceptance
Purchase Order

Importer

Shipment of Goods

Exporter

L/C Notification

Shipping Documents & Time Draft

L/C Application

American Bank
(Importers Bank)

L/C

Shipping Documents
7 & Time Draft Accepted

Japanese Bank
(Exporters Bank)

39

Money vs. Capital Markets

Money

Short-Term, < 1 Year

High Quality Issuers
Debt Only
Primary Market Focus
Liquidity Market--Low
Returns

Capital

Long-Term, >1Yr
Range of Issuer Quality
Debt and Equity
Secondary Market
Focus
Financing Investment-Higher Returns

Background on Bonds

Bonds represent long-term debt securities

The issuer of the bond is obligated to pay:

Contractual
Promise to pay future cash flows to investors

Interest (or coupon) payments periodically usually semiannually

Par or face value (principal) at maturity

Primary vs. secondary market for bonds

U. S. Treasury Bonds

Issued by the U.S. Treasury to finance federal

government expenditures
Maturity

Notes, < 10 Years

Bonds, > 10 to 30 Years

Active OTC Secondary Market

Semiannual Interest Payments
Benchmark Debt Security for Any Maturity

On basis of seasoining of claims

Primary and secondary market[edit]
Public securities markets are either primary or secondary markets. In the
primary market, the money for the securities is received by the issuer of the
securities from investors, typically in an initial public offering (IPO). In the
secondary market, the securities are simply assets held by one investor
selling them to another investor, with the money going from one investor to
the other.
An initial public offering is when a company issues public stock newly to
investors, called an "IPO/NIM for short. A company can later issue more
new shares, or issue shares that have been previously registered in a shelf
registration. These later new issues are also sold in the primary market, but
they are not considered to be an IPO but are often called a "secondary
offering". Issuers usually retain investment banks to assist them in
administering the IPO, obtaining SEC (or other regulatory body) approval of
the offering filing, and selling the new issue. When the investment bank buys
the entire new issue from the issuer at a discount to resell it at a markup, it
is called a firm commitment underwriting. However, if the investment bank
considers the risk too great for an underwriting, it may only assent to a best
effort agreement, where the investment bank will simply do its best to sell
the new issue.

Sources of retained earnings

What is a 'Private /direct Placement'
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. Private placement is the
opposite of a public issue, in which securities are made available for
sale on the open market. It is not followed in bd.
PUBLIC PLACEMENT
A public placement is where a security is offered to the whole market
rather than to selected investors. It is usually listed on a stock
exchange in relatively small denominations. The costs to the issuer
are usually higher than for a private placement but there may be
benefits in obtaining a wider range of investors in terms of public
recognition and liquidity for the secondary trading of the security

Functions of investment bank

investment banks are a bridge between large enterprises and the investor. Their main roles
are to advise businesses and governments on how to meet their financial challenges and to
help them procure financing, whether it be from stock offerings, bond issues
or derivative products.
Role as an advisor
Deciding how to raise capital is a major decision for any company or government. In most
cases, they lean on an investment bank either a large Wall Street firm or a boutique
banker for guidance.
Taking into account the current investing climate, the bank will recommend the best way to
raise funds. This could entail selling an ownership stake in the company through a stock
offer or borrowing from the public through a bond issue. The investment firm can also help
determine how to price these instruments by utilizing sophisticated financial models.
In the case of a stock offering, its financial analysts will look at a variety of different factors
such as earnings potential and the strength of the management team to estimate how
much a share of the company is worth. If the client is offering bonds, the bank will look at
prevailing interest rates for similarly rated businesses to figure out how much it will have to
compensate borrowers.
Investment banks also offer advice in a merger or acquisition scenario. For example, if a
business is looking to purchase a competitor, the bank can advise its management team on
how much the company is worth and how to structure the deal in a way thats favorable to
the buyer.

 Underwriting stocks and bonds

If an entity decides to raise funds through an equity or debt offering, one or
more investment banks will also underwrite the securities. This means the
institution buys a certain number of shares or bonds at a predetermined
price and re-sells them through an exchange. 2 method of underwriting;
Outright buying method:
This is an arrangement whereby and investment bank enters into a written
agreement, with the issuer of the securities, to make an outright
purchase from the issuer of securities to be offered to the public. The
underwriter, as the investment banker, is required to make its profit on the
difference between the purchase price - determined through either
competitive budding or negotiation - and the public offering price. Firm
commitment underwritings are to be distinguished from conditional
arrangements for distributing new securities, such as standby commitments
and best efforts commitments

.
In a firm commitment underwriting, the issuer already knows, at the time
the registration statement becomes effective how much money it is going to
receive from the offering. Usually, firm commitment underwriting are only
done for higher qualify companies or where the investment bank as
obtained indications of interest which reflect that it will be able to resell the
shares that it is purchasing from the issuer.
Best Efforts:
In this type of offering, investment bankers, acting as agents, agree to do
their best to sell an issue to the public. Instead of buying the securities
outright, these agents have an option to buy and an authority to sell the
securities. Depending on the contract, the agents exercise their option and
buy enough shares to cover their sales to clients, or they cancel the
incompletely sold issue altogether and fore go the fee. Best efforts deals
entail risks and delays from the issuer's standpoint. For the most part, the
best efforts deals that are seen today are handled by firms specializing in the
more speculative securities of new and unseasoned companies.

 'Bridge Loan'
A bridge loan is a short-term loan that is used until a person or
company secures permanent financing or removes an existing
obligation. This type of financing allows the user to meet current
obligations by providing immediate cash flow. The loans are shortterm (up to one year) with relatively high interest rates and are
backed by some form of collateral such as real estate or inventory.
Also known as "interim financing", "gap financing" or a "swing loan
How;
Purchase equity financing
Debt financing

 Listing and over-the-counter dealing[edit]

Securities are often listed in a stock exchange, an organized and officially
recognized market on which securities can be bought and sold. Issuers may
seek listings for their securities to attract investors, by ensuring there is a
liquid and regulated market that investors can buy and sell securities in.
Growth in informal electronic trading systems has challenged the traditional
business of stock exchanges. Large volumes of securities are also bought and
sold "over the counter" (OTC). OTC dealing involves buyers and sellers
dealing with each other by telephone or electronically on the basis of prices
that are displayed electronically, usually by financial data vendors such as
SuperDerivatives, Reuters and Bloomberg.
There are also eurosecurities, which are securities that are issued outside
their domestic market into more than one jurisdiction. They are generally
listed on theLuxembourg Stock Exchange or admitted to listing in London.
The reasons for listing eurobonds include regulatory and tax considerations,
as well as the investment restrictions.

Primary vs. Secondary Markets

PRIMARY

New Issue or
untouched of
Securities(IPO)
Exchange of Funds for
Financial Claim

Funds for Borrower; an

IOU for Lender

SECONDARY

Trading Previously Issued

Securities

No New Funds for Issuer

Provides Liquidity for

Seller

Organized vs. Over-the-Counter

Markets

Organized
Visible

Marketplace
Members Trade
Securities Listed
New York Stock
Exchange

OTC

Wired

Network of
Dealers
No Central, Physical
Location
All Securities
Traded off the
Exchanges

Fungible and non-fungible security[edit]

The terms "fungible" and "non-fungible" are a feature of assets.
If an asset is fungible, this means that if such an asset is lent, or placed with
a custodian, it is customary for the borrower or custodian to be obliged at
the end of the loan or custody arrangement to return assets equivalent to
the original asset, rather than the specific identical asset. In other words, the
redelivery of fungibles is equivalent and not in specie. For example, if an
owner of 100 shares of IBM transfers custody of those shares to another
party to hold for a purpose, at the end of the arrangement, the holder need
simply provide the owner with 100 shares of IBM identical to those received.
Cash is also an example of a fungible asset. The exact currency notes
received need not be segregated and returned to the owner.
Undivided securities are always fungible by logical necessity. Divided
securities may or may not be fungible, depending on market practice. The
clear trend is towards fungible arrangement

 Primary and secondary market[edit]

Public securities markets are either primary or secondary markets. In the
primary market, the money for the securities is received by the issuer of the
securities from investors, typically in an initial public offering (IPO). In the
secondary market, the securities are simply assets held by one investor
selling them to another investor, with the money going from one investor to
the other.
An initial public offering is when a company issues public stock newly to
investors, called an "IPO" for short. A company can later issue more new
shares, or issue shares that have been previously registered in a shelf
registration. These later new issues are also sold in the primary market, but
they are not considered to be an IPO but are often called a "secondary
offering". Issuers usually retain investment banks to assist them in
administering the IPO, obtaining SEC (or other regulatory body) approval of
the offering filing, and selling the new issue. When the investment bank buys
the entire new issue from the issuer at a discount to resell it at a markup, it
is called a firm commitment underwriting. However, if the investment bank
considers the risk too great for an underwriting, it may only assent to a best
effort agreement, where the investment bank will simply do its best to sell
the new issue.

 For the primary market to thrive, there must be a secondary market, or

aftermarket that provides liquidity for the investment securitywhere
holders of securities can sell them to other investors for cash. Otherwise,
few people would purchase primary issues, and, thus, companies and
governments would be restricted in raising equity capital (money) for their
operations. Organized exchanges constitute the main secondary markets.
Many smaller issues and most debt securities trade in the decentralized,
dealer-based over-the-counter markets.
In Europe, the principal trade organization for securities dealers is the
International Capital Market Association.[4] In the U.S., the principal trade
organization for securities dealers is the Securities Industry and Financial
Markets Association,[5] which is the result of the merger of the Securities
Industry Association and the Bond Market Association. The Financial
Information Services Division of the Software and Information Industry
Association (FISD/SIIA)[6] represents a round-table of market data industry
firms, referring to them as Consumers, Exchanges, and Vendors. In India the
equivalent organisation is the securities exchange board of India (SEBI).

 Public offer and private placement[edit]

In the primary markets, securities may be offered to the public in
a public offer. Alternatively, they may be offered privately to a limited
number of qualified persons in a private placement. Sometimes a
combination of the two is used. The distinction between the two is
important to securities regulation and company law. Privately placed
securities are not publicly tradable and may only be bought and sold
by sophisticated qualified investors. As a result, the secondary
market is not nearly as liquid as it is for public (registered) securities.
Another category, sovereign bonds, is generally sold by auction to a
specialized class of dealers.

Role of secondary mkt

1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country.
Every major change in country and economy is reflected in the prices of shares. The rise or
fall in the share prices indicates the boom or recession cycle of the economy. Stock
exchange is also known as a pulse of economy or economic mirror which reflects the
economic conditions of a country.
2. Pricing of Securities:

The stock market helps to value the securities on the basis of demand and supply factors.
The securities of profitable and growth oriented companies are valued higher as there is
more demand for such securities. The valuation of securities is useful for investors,
government and creditors. The investors can know the value of their investment, the
creditors can value the creditworthiness and government can impose taxes on value of
securities.
3. Safety of Transactions:

 In stock market only the listed securities are traded and stock exchange authorities include the companies
names in the trade list only after verifying the soundness of company. The companies which are listed they also
have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.

4. Contributes to Economic Growth:

In stock exchange securities of various companies are bought and sold. This process of disinvestment and
reinvestment helps to invest in most productive investment proposal and this leads to capital formation and
economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading
practices and by educating public about investment.
6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of
securities.

 9 Most Important Functions of Stock Exchange/Secondary Market

7 Liquidity:The main function of stock market is to provide ready market for sale and purchase of
securities. The presence of stock exchange market gives assurance to investors that their
investment can be converted into cash whenever they want. The investors can invest in long term
investment projects without any hesitation, as because of stock exchange they can convert long
term investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are actively traded so
such companies can easily raise fresh capital from stock market. The general public hesitates to
invest in securities of loss making companies. So stock exchange facilitates allocation of investors
fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various securities. These
attractive opportunities encourage people to save more and invest in securities of corporate
sector rather than investing in unproductive assets such as gold, silver, etc.

 Listing and over-the-counter dealing[edit]

Securities are often listed in a stock exchange, an organized and officially
recognized market on which securities can be bought and sold. Issuers may
seek listings for their securities to attract investors, by ensuring there is a
liquid and regulated market that investors can buy and sell securities in.
Growth in informal electronic trading systems has challenged the traditional
business of stock exchanges. Large volumes of securities are also bought and
sold "over the counter" (OTC). OTC dealing involves buyers and sellers
dealing with each other by telephone or electronically on the basis of prices
that are displayed electronically, usually by financial data vendors such as
SuperDerivatives, Reuters and Bloomberg.
There are also eurosecurities, which are securities that are issued outside
their domestic market into more than one jurisdiction. They are generally
listed on theLuxembourg Stock Exchange or admitted to listing in London.
The reasons for listing eurobonds include regulatory and tax considerations,
as well as the investment restrictions.