Economy for UPSC

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ECONOMY NOTES FOR UPSC

Economy holds a very important role in UPSC civil service examination be it in prelims or mains. Generally, it is seen that student from non economics background fear a lot with this subject so here we are with the solution i.e. a series of economy notes for upsc examination.

Economy question related to Indian economy are generally asked in prelims and mains but in mains certain occurrence of any event in global arena with light on Indian economy can be asked.

Notes presented here are in a series with a simpler and understandable language so follow regularly to get them.

Note- soon there will also notes for economy survey and budget too.

Chapter -7

Financial Market

Investment-The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.

Financial markets in India comprise the money market Government securities market, capital market, insurance market, and the foreign exchange market. Recently, the derivatives market has also emerged

financial market is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand.

Securities include stocks and bonds, and commodities include precious metals or agricultural products.

Financial market is a link between deficit spent and surplus spending. It automatically encourages savings, investment, capital formation etc. which leads to GDP, employment increment.

Classification of Financial Markets

components of indian finacial market

Financial markets are classified in different ways, which are given below:

  • On the Basis of Claim on Financial Assets.
  • On the Basis of Maturity of the claims.

On the basis of claim on financial assets:-Based on claim on financial assets, financial markets are following two types: Equity market and Debt Market.

Equity:- Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 11 said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights

Financial markets in which  equity  instruments  are  traded  are known as equity market. This market is also referred as the stock market. Two types of securities are traded in an equity market namely equity shares and preference shares.

Debt: – Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to lender. In Indian market there are different terms for debt instruments like bond and debenture for state and private sector respectively.

Financial markets in which debt instruments are traded are referred as debt market.Debt securities are normally issued for a fixed term and are redeemable by the issuer at the end of that term. Debt securities include debentures, bonds, deposits, notes or commercial papers

On the Basis of Maturity of the Claims:-Based on this, financial markets are following two types: Money market and Capital market.

  • Money Market:- Financial asset with a maturity of one year or less than one year is considered to be money market. It includes trade bills, promissory notes and government securities.

(b)Capital market:- A financial asset with a maturity of more than one year is part of the capital market. It is a market for long-term capital. The capital market provides long-term debt and equity finance for the government and the corporate sector.

Money market-

  • T-bills are financial assets trade in which assets are issue by government. T-bills are of different types like for 14, 91, 182, 364 days and are issued at discounted price (discounted price means ate the price less then written on assets)
  • Commercial papers are financial assets same as t-bills but here issuer is corporate. Started on the recommendation of Baghul committee. and these are issue at discount. These are of 7 to 1year.
  • Certificate of deposits are financial assets same as other above states assets but issued by banks to other financial institutions. Started in 1989 after the recommendation of Baghul committee. This instrument is also issued at discount.
  • Call money and notice money:-short term borrowing among bank and other financial institutions. Here collateral is not required. Call money is money for 1 day and notice money is money for 1 to 14 days.
  • Commercial bills are short term financial assets which a person can transfer(basically when a payee has to pay a certain amount he may not have payment at that time so it is a promissory note that certain amount of payment will be done in future and receiver can cash it at banks by transferring them trade bill).

Capital market-

  • Primary market here securities are purchased directly from the issuer. This is the market for new long-term or permanent capital.
  • Like government securities in primary market g-secs are from 1 to 20-30 years,basically involves securities issued to oil market companies, fertilizer companies here principle+interst is received at maturity and in case if g-sec are discounted at price then these securities will be called as zero coupon bonds.
  • Secondary market -Secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering.
  • -securities issued in the primary market are traded.
  • -the investor purchases an asset from another investor rather than from the issuing company

Basic concepts and words to know:-

  • Gilt edge securities– assured return securities, unlikely to default on payment, low rate of return.
  • Junk bond– securities which can default on payment, rate of return is high
  • Municipal bonds-securities issued by municipal corporations, banglore municipal corporation was first to issue in 1197, must contribute to 20% of project cost, minimum 3 years, minimum 75% must be subscribed else refund.
  • External commercial borrowings– instrument used to facilitate the access to foreign money by Indian corporations, ECB include commercial bank loan, ECB cannot be used for investment in stock market or speculation in real estate. The department of economic affairs along with RBI monitor regulate ECB guidelines and policies.
  • Mutual fund– raise money from public and invest them in stock market, bonds etc. SEBI regulates these.
  • Hedge funds– limited to few, non-transparent and is fully not regulated. SEBI don’t allow them.
  • Venture capital– money provided by financial institutions who invest along side management in young and rapidly growing companies. Important source of equity for startups
  • Angel investors is an affluent indivisual who provide capital for a business startup in exchange for convertible debenture. Angel investors are allowed to be registered all India financial institutions. SEBI restricted investment between 50 lakhs to 50 crore.
  • Initial Public Offer (IPO)-An IPO is referred simply an offering or flotation of issue of shares to the public for the first time. Initial Public Offer is the selling of securities to the public in the primary market. When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an Initial Public Offer (IPO)
  • Further Public Offer (FPO)-When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public it if called FPO Further Public Offer (FPO) is otherwise called as Follow on Offer.
  • Speculators-A speculator may buy securities in expectation of an immediate rise in price of the securities. Speculation refers to the buying and selling of securities with a hope to sell them at a profit, in future. Those who engage in such activity are known as ‘speculators
  • Bull –Bull is a speculator who expects a rise in prices of securities in the future. In anticipation of price rise, he makes purchases of shares and other securities with the intention to sell at higher prices in future.
  • Bear– A bear market is a market condition that occurs when the prices of shares decline or are about to decline. A bear is a speculator who expects a fall in the prices of shares in future and sells securities at present with a view to purchase them at lower prices in future.
  • Derivatives -Derivatives are specialized contracts which signify an agreement or an option to buy or sell the underlying asset up to a certain time in the in the future at a pre arranged price.
  • Book building -Book building is a process of price discovery mechanism used by corporate issuing securities. It is a mechanism used to discover the price of their securities.
  • Prospectus -A prospectus is an invitation to the public to subscribe to the shares and debentures offered by a company. A public company can issue shares and debentures through a prospectus.
  • Depository -A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.
  • Stock Exchange-The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

All the best and remember ek saathi aur bhi tha.

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