Financial Markets – 04
DEMAT – De Materialized form of Account. Investors are to trade not in Paper – form but in Electronic (i.e) DEMAT Account. Customer has to open Demat Account in a depository – partner which can be Bank (or) NBFC. SEBI regulates them under Depositories Act 1996. Eg are → Central Depository Services Ltd. (CDSL) & National Securities Depository Ltd. (NSDL).
DEMAT account compulsory for trading in Secondary Market. SEBI makes it Mandatory.
Types of Investors
- Depending on Buying Capacity
- Depending on Buying Behaviour
Depending on Buying Capacity
- Qualified Institutional buyers (QIB): These Investors with expertise and financially good to make large investments in Capital Market. E.g. Mutual funds, Insurance Company, Foreign Venture Capital Funds etc.
- Anchor Investors: They are QIB’s who are offered shares before IPO – Launch. This gives confidence to other Investor to subscribe IPO.
- Retail Investor: Retail investor refers to Individual investors.
Depending on Buying Behaviour
- Jobbers – full time engaged in buying / selling securities using money from their own pockets.
- STAG – buys newly issued securities from primary market and sell in Secondary Market for quick Profit.
- Bullish market
Just like a bull tends to throw his victim up in the air. Optimistic Speculator who hopes share prices will raise – so purchases.
- Bear market
A bear usually presses its victim down to ground. A pessimistic speculator who fears prices will fall, so he sells.
Other capital instruments
It is electronic trading platform which facilitates purchase and sale of specified commodities like agricultural, metals, bullion by providing spot delivery contracts in these commodities.
The facilities include clearing and settlement of trade and other services such as quality certification, warehousing, warehouse receipt financing etc. there are 4 spot exchange operating in India:
- National spot exchange ltd (NSEL)
- NCDEX spot exchange ltd
- Reliance spot exchange ltd
- Indian bullion spot exchange ltd.
Foreign Financial Investment
India opened its capital market for foreign portfolio investment (FPI) / Foreign institutional investment (FII) in 1994. It is one of the biggest drivers of India’s financial markets. It is regulated by SEBI but the ceiling of investment is kept by RBI. SEBI classifies FPI’s into 3 categories:
Category I – government entities/ institutions investing in Indian security market o behalf of the central bank
Category II – financial institutions, mutual funds, which are duly regulated by the country of their own
Category III – other financial institutions.
Regulations of SEBI for FPIS:
- Direct overseas listing of Indian companies is allowed.
- The Know your customer is relaxed.
- They can participate in commodities market.
|REITS are real estate investment funds and InVITS are investment are newly launched investment funds announced by SEBI.|
- FPIs are allowed to invest up to 25% in category III Alternative investment funds
- FPIs are allowed to invest in REITS and IVITS.
P-Notes are a derivative instrument in foreign jurisdiction by a SEBI regulated FII, against Indian securities. (Equity, bond, derivative or even index). They are known as overseas derivative instrument. They holders of it do not own the underlying security. They do not enjoy any voting rights in the company.
Hedge funds are free floating capital which moves swiftly towards the more profitable sectors of the economy. Primary aim of hedging is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.
Credit default Swap
It is a credit derivative that can be used to transfer credit risk from the investor exposed to the risk to an investor willing to take risk. It is a credit derivative transaction in which 2 parties enter into an agreement whereby one party (the protection buyer) pays the other party (Protection seller) periodic payments for the specified life of the agreement. It is similar to an insurance policy.
Inflation indexed bonds
RBI introduced Inflation indexed bonds to protect the investors from inflation. It provides returns that are always in excess of inflation, ensuring that price rise does not erode the value of savings.
Gold exchange traded funds (ETF)
These are open ended mutual fund schemes hat closely track the price of physical gold.
The central public sector enterprise exchange traded fund comprises the share of 10 blue chip PSUs. ETF is the security that tracks an index, a commodity or basket of assets such as an index funds, but trades like stock.