Have you ever promised anything to anyone?
It can be for any reason. Such as...
You may have promised to your girlfriend that you'd wait for her at 5 pm.
You may have promised to your boss that you shall never be late at office.
You may have promised to yourself that you shall never skip the gym from tomorrow.
Whatever it may be, my point is...
You make a promise when you are serious that you will keep it.
To put it another way,
When you make a promise, you make a deal. You agree with the other party that you shall keep your part of the deal. In return, you expect that he/she will keep his/her part.
When you know each other, you can make verbal deals.
But when you don't know the other party, you generally go for a written agreement for the deal. Isn't it?
It is true for share market deals as well.
When you buy a financial security from the share market, you make a deal with the seller of that security.
- You agree to pay the price to him.
- In return he agrees to deliver the financial security to you.
- Since you don't know him personally, you make this agreement via a share market. Like NSE or BSE.
- All records of your deals are maintained by the share market and monitored by the SEBI.
But, What Are financial securities?
Examples of financial securities are- company shares, government bonds, corporate bonds, mutual funds etc.
Securities are a kind of promise to respect a financial deal.
When you buy a company's share, it makes you a small partner of that company. The company promises to give you all the rights of a general shareholder. Like voting rights, dividends etc.
When you buy a bond, the bond issuer promises to pay you the interest at specific time intervals.
A huge number of deals happen everyday in India. It is very difficult to monitor or keep record of all these deals.
That's why the SEBI has selected some share markets as recognised stock exchanges in India. All the deals performed through these stock exchanges are under the control of SEBI.
All these recognised stock exchanges together is known as the securities market. It is also known as the share market to general people like you and me.
What is the function of securities market?
According to Wikipedia, the definition of the securities market is-
Securities market is a component of wider financial market where securities can be bought and sold between subjects of the economy, on the basis of demand and supply. - Wikipedia.
In simple language, securities market is a place where you can buy or sell financial securities.
SEBI has laid down rules that every buyer or seller of securities must obey strictly. This ensures safety of your money.
You can think about the job of the securities market from 3 (three) points of view-
- As an issuer of financial securities.
- As a buyer of financial securities.
- As a seller of financial securities.
Let us examine them one by one...
The issuers of financial securities
The securities market connects the issuers with the buyers easily.
You have seen above that securities are issued by companies, the government, mutual funds etc.
But, why do they issue securities?
Because, they need money to manage their work.
- Companies need money to run their businesses.
- Government needs money to spend on development activities.
- Mutual funds need money to invest and profit.
That's why they issue financial securities to raise money.
- Companies issue financial securities like shares and bonds.
- Government issues bonds. The government also issues shares of public sector companies like Coal India, MOIL etc.
- Mutual funds issue financial securities called units.
They get the required money when ordinary people like you and me buy these securities.
Banks and insurance companies also buy these securities from them. In fact they are the biggest buyers of these securities. In the previous article we discussed how banks use your money to lend to others and profit from it.
Here is a simple info-graphic to make you understand more easily.
The buyers of financial securities
Just like the case of issuers, the securities market helps the buyers to find the right options to invest their money.
Imagine that you have ₹50000 that you don't need now. You want to invest it so that you can get a good return. But, you don't want to suffer any risk of loss.
You also notice that the interest in bank fixed deposits are very low today. Therefore it will be better to invest your money in bonds.
You then search the securities market for a government bond or good corporate bond that offers better returns.
When you are satisfied about the safety and return of a bond, you invest your money in it.
The Sellers of financial securities
Besides the issuers and buyers, there are also sellers of securities.
Suppose you hold 100 pieces of some security. It is giving you good profit.
If you need some money today for some requirement, you can sell 20, 50 or all 100 of them via the security market.
Someone else will buy it from you. In this transaction, you are the seller and he is the buyer.
The sellers of securities are actually previous holders of them. They often sell their holding to take profit.
You saw that the securities market helps the buyers and issuers of securities by providing a platform to connect between themselves.
It also helps to record and monitor all the transactions between issuers, buyers and sellers of securities.
That's all for this article. See you!