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Financial Services


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Financial services refer to services

provided by the finance industry. Thefinance industry encompasses a broad

range of organizations that deal with the

management of money.

Among these organizations are banks,

credit card companies, insurance

companies, consumer finance

companies, stock brokerages, investmentfunds and some government sponsored

enterprises.


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In finance, the financial system the system thatallows the transfer of money between savers and

borrowers. It comprises a set of complex andclosely interconnected financial institutions,markets, instruments, services, practices, andtransactions.

Financial systems are crucial to the allocation ofresources in a modern economy. They channelhousehold savings to the corporate sector andallocate investment funds among firms; they

allow intertemporal smoothing of consumptionby households and expenditures by firms; andthey enable households and firms to share risks.


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Financial systems are crucial to the allocation

of resources in a modern economy. Theychannel household savings to the corporate

sector and allocate investment funds among

firms; they allow intertemporal smoothing of

consumption by households and expenditures

by firms; and they enable households and

firms to share risks.


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In economics, a financial market is a

mechanism that allows people to buy and sell

(trade) financial securities (such as stocks and

bonds), commodities (such as precious metals

or agricultural goods).

Financial market is differentiated in to

Capital Market

Commodity Market


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Capital Market

Capital markets may be classified as primarymarkets and secondary markets. In primary

markets, new stock or bond issues are sold to

investors via a mechanism known as

underwriting. In the secondary markets,

existing securities are sold and bought among

investors or traders, usually on a securities

exchange, over-the-counter, or elsewhere


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A capital market is a market for securities

(debt or equity), where business enterprises

(companies) and governments can raise long-

term funds. It is defined as a market in which

money is provided for periods longer than a

year, as the raising of short-term funds takesplace on other markets (e.g., the money

market). The capital market includes the stock

market (equity securities) and the bond

market (debt).


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Financial needs of the business can be grouped

in three categories

Long term financial needs

Medium term financial needs

Short term financial needs


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Long term financial needs

Such needs generally refer to funds for a

period exceeding 5-10 years. All investment in

plant,machinary,land,buildings are considered

as long term financial needs.Funds required to

finance permanent or hard core working

capital should also be procured from long

term sources.


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Medium term financial needs:

Such requirements refer to funds for a periodexceeding one year but not five years.

Sometimes long term requirements for which

long term funds can not be arranged

immediately ,may be met from medium term

sources and thus the demand of medium term

finance is generated.


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Short term financial needs:Short term

financial needs are meant to finance currentassets such as stock,debtors,cash.

The basic principle for meeting short term

financial needs of a concern is that such needs

should be met from short term sources and

for medium term financial needs from

medium term sources and for long term

financial needs from long term financialsources. Accordingly the method of raising

funds is decided


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Sources of finance for a business

Long term sources-

1. Equity shares

2. Preference shares

3. Retained earnings

4. Debentures/Bonds

5. Loans from financial institutions

6. Loans from commercial banks

7. Venture capital funding

8. International financing


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Medium term sources:

1. Preference shares

2. Debentures

3. Public deposits/Fixed deposits

4. Commercial banks5. Financial Institutions

6. Lease financing/Hire purchase Financing

7. External Commercial Borrowings8. Foreign currency bonds


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Owners Capital Or Equity Capital

1. A public limited company may raise funds from

promoters by way of issuing equity shares

2. These shareholders become the owners of thecompany, they elect the directors to run thecompany and have optimum control over themanagement.

3. These shareholders get dividends only whenthere are distributable profits.

4. The shareholders expect a higher rate of returnon their investments as compare to othersuppliers of long term funds


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Distinctive features of equity shares1) Owned capital: Equity share capital is

owned capital because it is the money of theshareholders who are actually the owners ofthe company.

(2)Fixed value or nominal value: Every share

has fixed value or a nominal value. Forexample, the price of a share is Rs. 10/- whichindicates a fixed value or a nominal value.

(3) Distinctive number: Every share is given a

distinct number just like a roll number for thepurpose of identification.


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(4) Attached rights: A share gives its owner the

right to receive dividend, the right to vote, the

right to attend meetings, the right to inspect

the books of accounts.

(5) Return on shares: Every shareholder isentitled to a return on shares which is known

as dividend. Dividend depends on the profits

made by a company. Higher the profits, higher

will be the dividend and vice versa.


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Preference share capital

These are special kind of shares, holders of

which enjoy priority both as regards to the

payment of a fixed amount of dividend and

repayment of capital on winding up of a

company. Such shares are cumulative, the dividend

payable in a year of loss gets carried over to

the next year till there is adequate profit toshare.


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Preference shares is a hybrid form of financingwhich takes some characteristics of equity

capital and some of debt capital. It is similar to equity because the dividend is

not a tax deductible.

I

t is similar to debt capital because rate ofpreference rate is fixed.

Cumulative convertible preference shares canalso be offered under which after certain

period shares are converted into equity shares


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Debentures/Bonds

Debentures are long-term Debt Instrument

issued by governments and big institutions for

the purpose of raising funds. Debentures are

also called as bonds in some countries.

There is no major difference betweendebentures and bonds, only difference is that

debentures can be converted in to equity

shares but bonds dont possess suchconvertible nature.


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Debentures provide more convenient mode of

long term funds.

The cost of capital raised through debentures

is quite low since the interest payable on

debentures can be charged as an expense

before tax

From investors point of view debentures offer

a more attractive prospect than the

preference shares since interest ondebentures is payable whether or not the

company makes profit.


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Primary Market

The primary market is that part of the capital

markets that deals with the issue of new

securities. Companies, governments or public

sector institutions can obtain funding through

the sale of a new stock or bond issue. Theprocess of selling new issues to investors is

called underwriting. In the case of a new stock

issue, this sale is an initial public offering (I

PO

)


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Features Of Primary Market

This is the market for new long term equitycapital. The primary market is the market

where the securities are sold for the first time.

Therefore it is also called the new issue

market (NIM).

In a primary issue, the securities are issued by

the company directly to investors.

The company receives the money and issuesnew security certificates to the investors


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Primary issues are used by companies for the

purpose of setting up new business or forexpanding or modernizing the existing

business.

The primary market performs the crucialfunction of facilitating capital formation in the

economy.


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Initial Public Offering

An Initial Public Offering (IPO) referred to

simply as an "offering" or "flotation," is when

a company (called the issuer) issues common

stock or shares to the public for the first time.

They are often issued by smaller, younger

companies seeking capital to expand, but can

also be done by large privately-ownedcompanies looking to become publicly traded.


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In an IPO the issuer may obtain the assistance

of an underwriting firm, which helps it

determine what type of security to issue

(common or preferred), best offering price

and time to bring it to market.

Underwriting refers to the process that a large

financial service provider (bank, insurer,

investment house) uses to assess the eligibility

of a customer to receive their products.


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An IPO can be a risky investment. For the

individual investor it is tough to predict what

the stock or shares will do on its initial day of

trading and in the near future since there is

often little historical data with which to

analyze the company. Also, most IPOs are ofcompanies going through a transitory growth

period, and they are therefore subject to

additional uncertainty regarding their future

value.


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When a company lists its shares on a public

exchange, it will almost invariably look to issue

additional new shares. The money paid by

investors for the newly-issued shares goes

directly to the company (in contrast to a later

trade of shares on the exchange, where themoney passes between investors).


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An IPO, therefore, allows a company to tap a

wide pool of stock market investors to provide

it with large volumes of capital for futuregrowth. The company is never required to

repay the capital, but instead the new

shareholders have a right to future profitsdistributed by the company and the right to a

capital distribution in case of a dissolution.


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Process for issuing IPOs It seeks the help of one or more investment

banks as underwriters to pursue

institutional investors and the general public

to purchase the firms stock,

It registers (usually by filing a form S-1)withthe Securities and Exchange Board ofIndia

(SEBI),

It presents the IPO fact file and prospects tothe investor community usually via a "Road

Show" lasting


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lasting anywhere from a week to 10 days

where the senior management(usually the

CEO and CFO)of the Company travels from city

to city to make presentations to and answer

questions from potential investors,

The underwriter determines a valuation for

the Company which forms the basis for the

number and price of shares to be offered in

the IPO, and


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IPOs generally involve one or more investment

banks known as "underwriters." The company

offering its shares, called the "issuer," enters a

contract with a lead underwriter to sell its

shares to the public. The underwriter then

approaches investors with offers to sell theseshares.


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A large IPO is usually underwritten by

investment banks led by one or more major

investment banks (lead underwriter). Upon

selling the shares, the underwriters keep a

commission based on a percentage of the

value of the shares sold (called the grossspread). Usually, the lead underwriters, i.e.

the underwriters selling the largest

proportions of theI

PO

, take the highestcommissionsup to 8% in some cases.


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