Tag: Market

  • Learn and understand the four Key Indicators of Marketing Efficiency

    Learn and understand the four Key Indicators of Marketing Efficiency

    What does Marketing Efficiency mean? Marketing efficiency is total revenue expressed as a percentage of total marketing costs including promotion, product development and sales expressed as a percentage of revenue. Learn and understand the four Key Indicators of Marketing Efficiency; A simple textbook definition says “Marketing efficiency is the maximization of input-output ratio.” We know that measuring the efficiency of marketing is as critical to the success of the modern marketer as is measuring the ROI of their marketing efforts. As well as, important thing; Marketing Research.

    Learn the Concept and Indicators of Marketing Efficiency.

    The strong form of marketing efficiency or market efficiency essentially proclaims that it is impossible to consistently outperform the market, particularly in the short term, because it is impossible to predict stock prices. If you’re not measuring your marketing efficiency, your marketing is going to suffer, but marketing efficiency is only the beginning what matters most is identifying the pieces of data that can make a difference in driving your marketing strategy.

    This may be controversial, but by far the most controversial aspect of market efficiency is the claim that analysts and professional advisors add little or no value to portfolios, especially mutual fund managers (with the notable exception of those managing funds that take on greater risks), and that professionally managed portfolios do not consistently outperform randomly selected portfolios with equivalent risk characteristics.

    Definition of Marketing Efficiency:

    Fred Waugh remarked that,

    “An unsophisticated student might make two false assumptions, first, that is it easy to define and to measure the efficiency of agricultural marketing and, second, that almost everyone is in favor of efficiency.”

    Wells, confessing that he did not know precisely how to measure marketing efficiency, added: “And I doubt whether our so-called efficiency experts know how.”

    As well as, Definition of Market Efficiency:

    The elements of market efficiency can be stated as follows:

    • Competition and the number of market participants: Greater the number of buyers and sellers participating in the transactions or greater the competition, the market efficiency increases.
    • Transfer of ownership and the balance of market power: The party which has greater knowledge has the greater power over deciding the terms of sale i.e. the terms of transfer of ownership. In an efficient market, both parties are well equipped with information so that the balance of power is easily maintained.
    • The efficiency of price formation: Efficient pricing of products occurs when a large number of buyers and sellers take part in the transaction and possess the same information about the market.

    The formula of Marketing Efficiency:

    Marketing Efficiency = (Revenue / Marketing cost) x 100

    For example, a firm with revenue of $2 billion dollars with total marketing costs of $250 million has the marketing efficiency of marketing efficiency = (2000/250) x 100 = 800%

    Marketing efficiency should not be confused with a profit rate as this doesn’t include any non-marketing costs such as the unit costs of your products. However, it serves as a useful benchmark and metric for measuring improvement to your marketing results. Also, don’t forget about understand; What is Marketing Planning?

    #Indicators of Marketing Efficiency:

    Due to the non-availability of standard efficiency criteria, the following indicators are sometimes identified with marketing efficiency.

    1. Marketing margins.
    2. Consumer price.
    3. Availability of physical marketing facilities, and.
    4. Market competition.

    Now, explain;

    A. Market Margins:

    In most cases, high marketing margins are regarded as prima facie evidence of gross inefficiency in marketing, and the middlemen who are blamed for being either inefficient, too numerous, or too monopolistic, are most often regarded as the major cause of high marketing margins. Whether high marketing margins, necessarily imply inefficiency in marketing must be analyzed in light of the following considerations.

    • Firstly, marketing margins will appear high in relation to Production costs of a commodity in any country or region in which those production costs are themselves quite low. The use of modern technology, which prodigiously lower costs of production, exhibits a magnifying effect on any given distributive margin.
    • Secondly, the extreme geographic specialization of production (especially in the developed countries) has resulted in a considerable increase in the cost of providing the ‘lace utility of farm goods. This, in turn, has served to increase transport costs and, therefore, marketing margins. But this may imply that opportunity costs of production are so low in areas far from the market that the low costs of production more than offset the high costs of marketing.
    • Thirdly, the increased amount of time utility embodied in food products (both perishable and non-perishable) has required extra storage and processing costs for their orderly marketing.
    • Fourthly, in all developed countries (and in a good number of developing countries, too) considerable changes have occurred with respect to farm utility of farm products. Consumers today are increasingly demanding that their food and agricultural non-food requirements be met in more and more finished form. This has tended to multiply marketing margins, especially in developed countries.
    • Finally, the high labor costs, especially in the retail trades, which are a special feature of the developed countries also contribute to high marketing. Self-Service shopping, which has gained considerable momentum in recent years, endeavors to minimize the impact of high labor costs, but it is not a magical device to reduce the overall costs to a significant extent. It merely eliminates the small fraction of the costs due to those retail services that come to be performed mainly by the consumer.

    The major marketing costs are those which result due to enhanced improved utilities of form time and place. They represent the costs of the services which the consumer demands and for which he is willing to pay. In view of the above consideration, it could be safely concluded that distributive margins which form a longer and larger share of food expenditure have not been inconsistent with efficient marketing in the developed countries. In fact, these marketing margins have been a sine qua non for an effective marketing system in developed countries.

    What follows from the above illustration is that the size and composition of marketing margins can be used as a useful measure of efficiency, but to use it effectively requires an extremely sensitive weighing balance. The size of margin cannot be related to anything else until it is accurately related to the quantum and type of services yielded by it. Let us analyze this aspect briefly.

    Marketing margin consists of two elements:

    1. Explicit costs paid for the performance of various marketing functions, and.
    2. The profit of the market intermediaries.

    Now, explain;

    1. The Cost Component:

    The costs in marketing are incurred in the performance of various marketing functions of assembling, transportation, storage, processing, etc. or in other words, in the creation of various utilities. In order to minimize costs, the marketing facilities should operate at the maximum possible capacities with the least possible losses of produce.

    We can decide whether the costs prevailing in the marketing system have any economic justification only after we have analyzed the following factors:

    • The intensity of competition, especially in light of various state policies.
    • The extent of utilization of the capacity of marketing facilities.
    • The quantum and nature of services rendered in creating time, place and form utilities.
    • The quantum of production losses in distribution.
    2. The Profit Component:

    The subject of marketing profit has been rather extensively covered in the marketing literature of the developing countries. There are more abuses than appreciations attached to this subject. It is usually stated that the profit element predominates in the aggregate margin on agricultural commodities as a result of certain superfluous or inefficient intermediaries in the existing marketing channels.

    Most of the studies relating to this topic do not, however, endeavor to quantify the cost of various direct and indirect services rendered by the intermediaries. Much of what is called profit, in fact, reflects middlemen costs.

    For instance, studies of middlemen profit in the developing countries usually tend to ignore the following cost, items:

    • The cost on the money loaned out by the intermediary to farmers, consumers, or other intermediaries;
    • The cost of risks and uncertainties borne by the middleman in agricultural trade;
    • The cost of social help extended to the farmers;
    • The cost of entertainment at his business premises;
    • The cost due to spoilage of produce; and
    • The cost for bribes or gifts and for some kinds of levies, taxes and service charge not in fact related to the actual services provided.

    In order to arrive at the real profit figures, the cost of these and other indirect services has to be quantified. In determining the economic justification of various intermediaries the following factors would be carefully analyzed:

    • The intensity of competition at all trade levels.
    • The number of risks and uncertainties involved.
    • The size of the business.
    • Alternative employment opportunities in society.
    • Restrictive state policies.

    B. Consumer Prices:

    Rising consumer prices are usually regarded as a measure of market inefficiency.

    But the price of any commodity is a function of:

    • Consumer income.
    • Available supplies in relation to effective demand.
    • Money supply.
    • Prices of substitutes and complements.
    • Seasonal factors.
    • Marketing margins and distributional patterns.
    • State price policies, and.
    • General Price level.

    Increase in consumer prices is commonly attributed to manipulation by middlemen artificially restricting the distribution of commodities to their own advantage or creating artificial scarcities in the distribution of commodities. Actually, most marketing costs are relatively sticky and tend to change very slightly as compared to price changes caused by other factors.

    Even when deficiencies in the distributional patterns affect the price structure, they are usually caused by state price and procurement policies. High consumer prices are, therefore., largely due to factors other than marketing inefficiencies, although marketing often becomes the scapegoat for ills it has not directly caused.

    C. Physical Marketing Facilities:

    The inadequacy of physical marketing facilities like transport, storage, processing, etc. is also a subject of criticism in discussions of the efficiency of the marketing system. This has been common especially since the recent agricultural breakthrough in many of the developing countries. Although the availability of physical facilities has a direct bearing on marketing efficiency, to treat it as an important efficiency is questionable.

    The paucity of physical facilities may exist because of subsistence farming, the seasonal nature of agricultural production, the structure and wide dispersion of farm producing units, low quantum of marketable surplus, the stage of economic development, and the huge overhead expenditure involved in the provision of such facilities in the developing countries. Where physical facilities do exist, they are seldom based on a reassessment of the economic potential and requirements of the area.

    In the developing countries, the spatial distribution of physical marketing facilities is so unorganized that at certain places they are underutilized and at other over utilized. There is a need to determine the exact demands and patterns of distribution and the reallocation of existing facilities needed for their efficient use.

    Learn and understand the four Key Indicators of Marketing Efficiency
    Learn and understand the four Key Indicators of Marketing Efficiency, #Pixabay.

    D. Market Competition:

    The intensity of competition has been widely suggested as a major indicator of market inefficiency. Though competition is desirable in itself, the methods of its measurement lack uniformity, precision, and objectivity. It is conventional for researchers to blame the policymaker in a developing country for any lack of competition.

    On the other hand, where competition is intense the researcher who considers it the key to efficiency is hard to put to indicate areas of possible improvement or to define relative degrees of efficiency. Excessive focus on quality competition is likely to be found in a market that lacks progressiveness and growth orientation; excessive attention to private competition leads towards greater concentration among sellers and the development of monopolistic organization with all of its attendant evils.

    Reliance on competition as a key indicator of efficiency is thus a static approach which disregards dynamic considerations, lacks a standard of comparison, and pays no attention to economic and social norms based on the value system of an economy. Use of competition as a measure of marketing efficiency would have to be selective and judicious to have any constructive influence on market performance.

    Since market performance refers to the end results of market adjustment by buyers and sellers in the market, the intensity of market competition may be considered both as a performance norm and as the net outcome of a reorganization of the market structure and market conduct.

    Thus the effective use of market competition as a measure of marketing efficiency would require an appropriate application of the criteria of workability for market structure, conduct and performance with all their interaction effects, so as to increase the intensity of competition to the extent socially desirable, while also moving towards such pre-designated social and economic goal.

  • Purpose and Limitations of Stock Market Index

    Purpose and Limitations of Stock Market Index

    What does the Stock Market Index mean? Stock Index futures offer the investor a medium for expressing an opinion on the general course of the market. The general movement of the stock market is usually measured by averages or indices consisting of groups of securities that are supposed to represent the entire stock market or its particular segments. Thus, Security Market Indices or Security Market Indicators provide a summary measure of the behavior of security prices and the stock market. So, what is the topic we are going to discuss: Purpose and Limitations of Stock Market Index!

    Explained Stock Market Index Concept with their Purpose and Limitations!

    The principal stock market indices used in India are the Bombay Stock Exchange Sensitive Index (BSE Sensex) and the S&P CNX Nifty known as the NSE Nifty (National Stock Exchange Fifty). In addition, these contracts can be used by portfolio managers in a variety of ways to alter the risk-return distribution of their stock portfolios. For instance, much of a sudden upward surge in the market could be missed by the institutional investor due to the time it takes to get money into the stock market.

    Stock Index Futures:

    By purchasing stock- index contracts, the institutional investors can enter the market immediately and then gradually unwind the long futures position as they are able to get more funds invested the stock. Conversely, after a run-up in the value of the stock portfolio (assuming it is well diversified and correlates well with one of the major indexes) a portfolio manager might desire to lock in the profits much after being required to report this quarterly return on the portfolio.

    By selling an appropriate number of stock index futures contracts, the institutional investors could offset any losses on the stock portfolio with corresponding gains on future position. As a speculation tool, stock index futures represent an inexpensive and highly liquid short-run alternative to speculating on the stock market.

    Instead of purchasing the stock that makes up an index or proxy portfolio, a bullish (bearish) speculation can take a long (short) position in an index futures contract, then purchase treasury securities to satisfy the major requirements. A long or short speculative futures position is referred to as a purely speculative position or a naked (outright) position.

    The Purpose of an Index in the Stock Market:

    The security market indices are indicators of different things and are useful for different purposes.

    The following are the important uses of a stock market index:

    • Security market indices are the basic tools to help and analyze the movements of prices of various stocks listed on stock exchanges and are useful indicators of a country’s economic health.
    • Indices can be calculated industry-wise to know their tread pattern and also for comparative purposes across the industries and with the market indices.
    • The growth in the secondary market can be measured through the movement of indices.
    • The stock market index can be used to compare a given share price behavior with past movements.
    • Generally, stock market indices are designed to serve as indicators of broad movements in the securities market and as sensitive barometers of the changes in trading patterns in the stock market.
    • The investors can make their investment decisions accordingly by estimating the realized rate of return on the stock market index between two dates.
    • Funds can be allocated more rationally between stocks with knowledge of the relationship of prices of individual stocks with the movements in the market.
    • The return on the stock market index, which is known as the market return, is helpful in evaluating the portfolio risk-return analysis. According to modern portfolio theory’s capital asset pricing model, the return on a stock depends on whether the stock’s price follows prices in the market as a whole; the more closely the stock follows the market, the greater will be its expected return.
    Purpose and Limitations of Stock Market Index
    Purpose and Limitations of Stock Market Index, Image credit from #Pixabay.

    Limitations of Stock Market Index (Indices):

    Though stock market indices are the basic tools to help and analyze the movements of the price of the stock markets and are a useful indicator of a country’s economic health, they have their own limitations also.

    The following points deal with those limitations:

    • Whenever a company issues rights in the form of convertible debentures (to be converted at a later stage) or other instruments (warrants) entitling the holder to acquire one equity share of the company at a specified price at a notified future date, the equity capital increases only on conversion of debentures or the exercise of warrants/Secured Premium Notes (SPNs), option for equity shares but the market adjusts the ex-rights price of the share immediately (on the day the share starts trading ex-rights) on the basis of the anticipated increase in equity capital and likely reduced earnings per share, etc.
    • Hence, some modification is needed to adjust the equity capital suitably in advance. But the exact procedure by which this can be done is very difficult to state since the internal market mechanism which adjusts the ex-rights share price is almost impossible to know precisely.
    • Again, this is a common limitation of all the indices and so far, the increased equity capital is considered only after the debentures are converted into shares and are acquired for warrants/SPNs and the new shares are listed for trading on the stock exchange.
    • The coverage (in terms of number of scrips, number of stock exchanges used and the respective weights assigned) is different for all the indices and hence, each index may give only a partial picture of the movement of prices or the state of the market presented may be misleading.
    • The financial institutions sometimes convert the loans extended by them to companies into equity shares at a specified date. This causes sudden and significant changes in the market capitalization and hence the weights assigned to those scrips change violently.
    • The various stock market indicators around the world have been in use for many years and it has satisfied the needs of millions of investors and stockbrokers. But the stock markets, by their very nature, are very dynamic and hence, the indices should be revised or adjusted periodically to reflect the changed conditions so that they continue to be relevant.
    • Whenever prices of scripts listed on more than one stock exchange are used, most liquid prices (on anyone stock exchange) should be used (rather than the present practice of using the arithmetic average of prices on all the exchanges, as the same script may not enjoy the identical degree of liquidity on all exchanges).

    The limitations indicated may not be eliminated totally, but appropriate adjustments are certainly called for. The classification of industries into various groups for calculation of various industry indices is presently rather vague and presents problems in the case of diversified companies. Also learned, What does Welfare Economics mean? Measuring and Value decisions!

    This should be made uniform or the classification should be made in such a way that it reflects the major operations carried on by each company. Overall, one can say that the various stock market indicators devised have more or less served their purpose, despite their limitations but these can be made more effective and dynamic by introducing appropriate modifications 0£ the existing ones to serve the investing public better.

  • Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!

    Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!

    What does the Capital Market mean? The capital market is a market which deals in long-term loans. It supplies industry with fixed and working capital and finances medium-term and long-term borrowings of the central, state and local governments. The Capital Market functions through the stock exchange market. A stock exchange is a market which facilitates buying and selling of shares, stocks, bonds, securities, and debentures. The capital market deals in ordinary stock are shares and debentures of corporations, and bonds and securities of governments. So, what is the topic we are going to discuss; Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!

    Here are explained; Indian Capital Market: The Concept of Market understand by their Nature, Classification, Growth, and Development!

    The capital market plays an important role in immobilizing saving and channel is in them into productive investments for the development of commerce and industry. It is not only a market for old securities and shares but also for new issues shares and securities. In fact, the capital market is related to the supply and demand for new capital, and the stock exchange facilitates such transactions.

    Thus the capital market comprises the complex of institutions and mechanisms through which medium-term funds and long­-term funds are pooled and made available to individuals, business and governments. It also encompasses the process by which securities already outstanding are transferred.

    Nature of Indian Capital Market:

    Like the money market, capital market in In­dia is dichotomized into organized and unor­ganised components. The institution of the stock exchange is an im­portant component of the capital market through which both new issues of securities are made and old issues of securities are pur­chased and sold. The former is called the “new issues market” and the latter is the “old issues market”. The stock exchange is, thus, a specialist market place to facilitate the exchanges of old securities. It is known as a “secondary market” for securities.

    The stock exchange dealings for “listed” securities are made in an open auction market where buyers and sellers from all over the country meet. There is a well-defined code of bye-laws according to which these dealings take place and complete publicity is given to every transaction. As far as the primary mar­ket or new issues market is concerned, it is the public limited companies instead of a stock market that deals in “old issues” that raises funds through the issuance of shares, bonds, debentures, etc. However, to conduct this busi­ness, the services of specialized institutions like underwriters and stockbrokers, merchant banks are required.

    The capital market in India is divided into the gilt-edged market and the industrial securities market. The gilt-edged market refers to the market for Govt. and semi-govt. securities. The industrial securities market refers to the market for equities and deben­tures of companies.

    The industrial securities mar­ket is further divided into:

    • New issues market, and.
    • Old capital market.

    Both markets are equally important but often the new issue market is much more important from the point of economic growth. Economic liberalization provides a strong stimulus to the security market. There is a tremen­dous growth in the number of issues, the amount raised, listed companies, listed stock, market turno­ver, and capitalization etc. Security market wit­nessed steep rising curve in the decades of 80s.

    Many new financial instruments were introduced; new institutions like Stock Holding Corporation of India Ltd, National Stock Exchange, Over the Coun­ter Exchange of India Ltd. etc. were created. Further, various steps were taken to protect the interests of investors and streamlining the trading mechanism. Computerization is done for faster set­tlement of transactions. Screen-based trading pro­vides the full transparency of the transactions. After the abolition of the managing agency system in 1970, the importance of the capital market in India cannot be overemphasized.

    The Indian capi­tal market has now been a very vibrant and grow­ing market. It is one of the leading capital markets in developing countries. We have the second largest number of listed companies (6500) in the world, next only to the USA have the largest number of exchanges in any country—23 Stock Exchanges. We have 15 million investors. And in the decade of 80s, the amount raised from the Indian capital mar­ket went up from Rs. 200 crores a year to Rs. 10,000 crores a year.

    The Indian capital market is the market for long term loanable funds as distinct from money market which deals in short-term funds. It refers to the facilities and institutional arrangements for borrowing and lending “term funds”, medium term, and long term funds. In principal capital market loans are used by industries mainly for fixed investment. It does not deal in capital goods but is concerned with raising money capital or purpose of investment.

    The Classification of Indian Capital Market:

    The capital market in India includes the following institutions;

    • Commercial Banks.
    • Insurance Companies (LIC and GIC).
    • Specialized financial institutions like IFCI, IDBI, ICICI, SIDCS, SFCS, UTI etc.
    • Provident Fund Societies.
    • Merchant Banking Agencies, and.
    • Credit Guarantee Corporations.

    Individuals who invest directly on their own insecurities are also suppliers of the fund to the capital market. Thus, like all the markets the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital market attempts to provide adequate capital at a reasonable rate of return for any business, or industrial proposition which offers a prospective high yield to make borrowing worthwhile.

    The Indian capital market is divided into the gilt-edged market and the industrial securities market. The gilt-edged market refers to the market for government and semi-government securities, backed by the RBI. The securities traded in this market are stable in value and are much sought after by banks and other institutions. The industrial securities market refers to the market for shares and debentures of old and new companies. This market is further divided into the new issues market and old capital market meaning the stock exchange.

    The new issue market refers to the raising of new capital in the form of shares and debentures, whereas the old capital market deals with securities already issued by companies. The capital market is also divided between the primary capital market and secondary capital market. The primary market refers to the new issue market, which relates to the issue of shares, preference shares, and debentures of non-government public limited companies and also to the realizing of fresh capital by government companies, and the issue of public sector bonds.

    The secondary market, on the other hand, is the market for old and already issued securities. The secondary capital market is composed of industrial security market or the stock exchange in which industrial securities are bought and sold and the gilt-edged market in which the government and semi-government securities are traded.

    The Growth of the Indian Capital Market:

    The following growth below are;

    Before Independence of Indian Capital Market:

    Indian capital market was hardly existent in the pre-independence times. Agriculture was the mainstay of the economy but there was hardly any long term lending to the agricultural sector. Similarly, the growth of industrial securities market was very much hampered since there were very few companies and the number of securities traded in the stock exchanges was even smaller.

    Indian capital market was dominated by the gilt-edged market for government and semi-government securities. Individual investors were very few in numbers and that too was limited to the affluent classes in the urban and rural areas. Last but not least, there were no specialized intermediaries and agencies to mobilize the savings of the public and channelize them to invest.

    After Independence of Indian Capital Market:

    Since independence, the Indian capital market has made widespread growth in all the areas as reflected by the increased volume of savings and investments. In 1951, the number of joint stock companies (which is a very important indicator of the growth of capital market) was 28,500 both public limited and private limited companies with a paid up capital of Rs. 775 crore, which in 1990 stood at 50,000 companies with a paid up capital of Rs. 20,000 crore. The rate of growth of investment has been phenomenal in recent years, in keeping with the accelerated tempo of development of the Indian economy under the impetus of the five-year plans.

    Indian Capital Market Understand their concept by Nature Classification Growth and Development
    Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development! Image credit from #Pixabay.

    The Development of Indian Capital Market:

    Here we detail about the eight developments in the Indian capital market.

    Financial Intermediation:

    The Indian capital market has grown due to the innovation of the mechanism of indirect financing. This innovation has enhanced the efficiency of the flow of funds from ultimate savers to ultimate users through newly established financial intermediaries like UTI, LIC, and GIC. The LIC has been mobilizing the savings of households to build a “life fund”.

    It has been deploying a part of “life fund” to purchase the shares and debentures of the companies. Until 1991 UTI was amongst the top ten shareholders in one out of every three companies listed in the Stock Exchange in which it had a shareholding. Likewise, UTI has been mobilizing savings of households through the sale of “units” to invest in securities of “blue-chip” companies.

    In short, financial intermediaries like LIC, UTI, and GIC have activated the growth process of the Indian capital market. It is evident from the rising intermediation ratio. The intermediation ratio is a ratio of the volume of financial instruments issued by the financial institutions, i.e., secondary securities to the volume of primary securities issued by non-financial corporate firms rose from 0.27 during 1951-56 to 0.37 during 1979-80 to 1981-82.

    Underwriting of Securities:

    The New Issue Market as a segment of the capital market can be activated through institutional arrangements for the underwriting of new issues of securities. During the pre-independence period, the volume of securities underwritten was quite minimal due to lack of an adequate institutional arrangement for the provision of underwriting. Stockbrokers and banks used to perform this function.

    In recent years, the volume and amount of securities underwritten have tremendously increased owing to the increasing participation of specialized financial institutions like LIC and UTI and the developed banks like 1FC1,1CICI and IDBI in underwriting activities. It is evident from the fact that the number of securities underwritten was only 55 percent in 1960-61, whereas at present it is about 99 percent.

    Response to the Offer of Public Issues of Shares and Bonds:

    Traditionally investors in India being risk-investors had been reluctant to invest in shares of public limited companies. Hence, industrial securities as a form of investment were not popular in India before 1951. However, since 1991 public response to corporate securities has been improving. But equity-cult has yet to be developed in rural areas.

    It is important to point out that the public response to new issues of shares and bonds depends upon number of factors such as rates of return on industrial securities relative to rates of return on non-marketable financial assets and real assets, government’s monetary policy and fiscal policy and above all legal protection to investors in recent years.

    All the above-mentioned factors have contributed to the growth of public response to the new issue of corporate securities. In short, growing response to public issues has strengthened the Indian capital market. It is evident from the fact that the number of shareholders rose from 60 lakh in 1985 to 160 lakh in 1994.

    Merchant Banking:

    The role of merchant banking in India’s capital market can be traced back to 1969 when Grind lays Bank established a special cell called the “Merchant Banking”. Since then all the commercial banks have set up the “Merchant Banking Division” to play an important role in the capital market. The merchant banking division of commercial banks advises the companies about economic viability, financial viability and technical feasibility of the project.

    They conduct the initial ‘spade work” to find out the investment climate to advise the company whether the public issue floated would be fully subscribed or under-subscribed. The merchant banks in India act as the underwriter as well as the manager of new issues of securities. The Securities and Exchange Board of India (SEBI) regulates all merchant banks as far as their operations relating to issue activity are concerned. To sum up, the emergence of merchant banking has strengthened the institutional base of the Indian capital market.

    Credit Rating Agencies:

    Of late, credit rating agencies have emerged in the financial sectors. This is an important development for the growth of the Indian capital market. Investment Information and Credit Rating Agency of India (ICRA) rates bonds, debentures, preference shares, Corporate Debentures, and Commercial Papers.

    As Credit Rating Information Services of India Ltd. (CRISIL) is a pioneer in credit rating, it rates debt instruments of banks, financial institutions, and corporate firms. The credit assessment of companies issuing securities helps in the growth of New Issue Market segment of the capital market.

    Mutual Funds:

    Mutual funds companies are investment trust companies. Mutual funds schemes are designed to mobilize funds from individuals and institutional investors, who in exchange get units which Can be redeemed after a certain lock-in period, at their Net Asset Value (NAV). The mutual fund schemes provide tax benefits and buyback facility. The Unit Trust of India (UTI) can be regarded as the pioneer in the setting up of mutual funds in India. Of late, commercial banks have also launched in India mutual funds schemes.

    Can-stock scheme of the Canara bank and LIC’s scheme, such as Dhanashree, Dhanaraksha, and Dhanariddhi are mutual funds schemes. Since mutual funds schemes help to mobilize small savings of the relatively smaller savers to invest in industrial securities, so these schemes contribute to the growth of the capital market. The total assets of mutual funds companies increased from Rs. 66,272 crore in 1993-94 to Rs. 99,248 crore in 2005 and to Rs. 4,13,365 crore in 2008. The investment of mutual funds in the secondary market influences the share prices in the stock exchange.

    Stock Exchange Regulation Act:

    The growth of capital market would not have been possible had the Government of India not legislated suitable laws to protect the investors and regulate the Stock Exchanges. Under this Act, only recognized stock exchanges are allowed to function. This Act has empowered the Government of India to inquire into the affairs of a Stock Exchange and regulate it’s working. into the affairs of a Stock Exchange and regulate it’s working.

    The Government of India established the Securities and Exchange Board of India (SEBI) on April 12, 1988, through an through an extraordinary notification in the Gazette of India. In April 1992, SEBI was granted statutory recognition by passing an Act. Since 1991, SEBI has been evolving and implementing various measures and practices to infuse greater transparency in the capital market in the interest of investing public and orderly development of the securities market.

    Liberalization Measures:

    Foreign Institutional Investors (FII) have been allowed access to the Indian capital market. Investment norms for NRIs have been liberalized, so that NRIs and Overseas Corporate Bodies can buy shares and debentures, without prior permission of RBI. This was expected to internationalize the Indian capital market.

    To sum up, the Indian capital market has registered an impressive growth since 1951. However, it is only since the mid-1980s that new institutions, new financial instruments, and new regularity measures have led to speedy growth of the capital market. The liberalization measures under the New Economic Policy (NEP) gave a further boost to the growth of the Indian capital market.

  • What is the Euro Market? Meaning and Definition

    What is the Euro Market? Meaning and Definition

    What is Euromarket? The euro market acts as a major source of international trade. Euro the currency uses by the European Union (EU) countries, so, the market the Euro uses for can name Euromarket. This article explains the Euro Market or Euromarket with their topics Meaning and Definition. It has in view all the transactions done by The banks in Euro currencies, Euro notes, Euro commercial papers, Euro bonds. It is a market that develops in Europe. Also, the market deals with US dollars as well and it can name the Eurodollar market. Also, the question may you are like to learn; What is Credit Card Services?

    The interpretation of the Euromarket or Euro Market meaning and definition.

    The Euro market is a large market comprising many member nations of the EU and facilitates. The free movement of goods and services, in other words, efficient trade mechanisms such as low tariffs, quotas, etc. are put in place and have a centralizing monetary policy with most of them using a common currency – Euro.

    The Euro currency market or eurodollar consists of Euro Banks that accept deposits and offers credit in foreign currencies. Also, Euro currency refers to a currency that is freely convertible and is deposited in a bank present in a country where the currency is non-domestic. The bank can be either a foreign bank or a foreign branch of a US domestic bank.

    Meaning and Definition of Euro Market or Euromarket:

    Currency is borrowing and lending by institutions locating in different countries, there is a capital flow that seems to uncontrol. Theoretically, it cannot be a national control over this market. From the practical point of view, the market forces dictate the lending rates; the rates do not diverge from the domestic lending ones, it happens only for a short interval of time.

    The international banks are the main operators; financial institutions are also allowing to enter the market. Also, the Eurodollar market is complement by Euro bonds and makes longer-term funds available. The bonds are payable to bearer without deduction of tax. They are issuing by bank consortia and are placing with investors.

    London and Luxemburg have developed a secondary market in bonds which has become a supranational market; it is not subject to normal domestic regulations but it is affecting by international events. Important sums of dollars have deposits in banks which are outside the USA and many USA banks have branches overseas. Euro-notes are notes issuing in bearer form and negotiable.

    A note issuance facility is a credit facility, the company obtains a loan underwritten by banks which issue a series of short-term Euro currency notes used for replacing the already expired ones. Euro notes are short-term notes issuing in US dollars. Commercial papers relate to short-term promissory notes issued by companies; they are purchasing by investors.

    They are issuing at a discount to the face value they have. The corporations can borrow more cheaply than via bank loans; the investors may earn a higher return on their funds than it is available on bank deposits. A bank usually undertakes the issuing of these papers either directly or through dealers.

    What is the Euro Market Meaning and Definition
    What is the Euro Market? Meaning and Definition, Image credit from #Pixabay.
  • What is the Price Mechanism or Market Mechanism?

    What is the Price Mechanism or Market Mechanism?

    Price Mechanism or Market Mechanism (Hindi); The mechanism through which the prices of commodities and factor services get determined through the free play of market forces of demand and supply. The theory that the determinations about what prices and quantities to purchase are essentially set by both sellers and buyers in the market. Define – What is the Price Mechanism or Market Mechanism?

    Price Mechanism or Market Mechanism, Explain their meaning and definition.

    The price mechanism is an economics term, which says that demand and supply of goods and services set their prices. Let me explain with the help of a diagram. The demand curve is a curve which state demand for a certain commodity at a certain price. Therefore as the prices increases, demand goes down. For example; think this from a consumer perspective, the demand for buying a car less than 10 lac (1 million) is more than the demand for luxurious cars which price in crores.

    Meaning of Price Mechanism or Market Mechanism;

    “In economics, a price mechanism is the manner in which the prices of goods or services affect. The supply and demand for goods and services, principally by the price elasticity of demand. They affect both buyers and sellers who negotiate prices. A price mechanism, part of a market mechanism, comprises various ways to match up buyers and sellers. It is a mechanism where price plays a key role in directing the activities of producers, consumers, resource suppliers. An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in trade. The purchaser will announce a price he is willing to pay (the bid price) and the seller will announce a price he is willing to accept (the asking price).” By Wikipedia.

    According to the Business Dictionary,

    “System of interdependence between the supply of a good or service and its price. It generally sends the price up when supply is below demand, and down when supply exceeds demand. The price mechanism also restricts supply when suppliers leave the market due to low prevailing prices and increase it. When more suppliers enter the market due to high obtainable prices.”

    According to capitalistic Economy,

    “Economic system based (to a varying degree) on private ownership of the factors of production (capital, land, and labor) employed in the generation of profits. It is the oldest and most common of all economic systems and, in general, is synonymous with the free market system.”

    Definition of Price Mechanism or Market Mechanism;

    The following definition below are;

    According to Cairncross.

    “It is the mechanism by which prices adjust themselves to the pressure of demand and supply and in their turn operate to keep demand and supply in balance.”

    The interaction of buyers and sellers in free markets enables goods, services, and resources to allocate prices. Relative prices and changes in price reflect the forces of demand and supply and help solve the economic problem. Resources move towards where they are in the shortest supply, relative to demand. And, away from where they are the least demand.

    What is the Price Mechanism or Market Mechanism - ilearnlot
    What is the Price Mechanism or Market Mechanism? Image Credit from ilearnlot.com.

    Features of Control Price Mechanism:

    The basic features are as below:

    • Prices fixed by the government.
    • Central Planning Authority takes all the decisions on production on behalf of the government.
    • The authority determines the level of new investment. And, allocates resources in different sectors for optimum utilization.
    • The authority distributes the different goods among the consumers through ration shops or fair price shops.
    • The government fixes the prices of the different factors of production like wage rate and interest rate etc.

    Where to be Price Mechanism in the Economy:

    A blended economy tackles the issue of what to create and in what amounts in two different ways:

    • The market mechanism (for example powers of interest and gracefully) assists the private part in choosing what items with delivering and in what amounts. In those circles of creation where the private segment contends with the open division, the nature and amounts of wares to deliver are likewise chosen by the market mechanism.
    • The focal arranging authority chooses the nature and amounts of merchandise and enterprises to deliver where the open part has a restraining infrastructure. On account of purchaser and capital merchandise, items are created fully expecting social inclinations. Prices fixed by the focal arranging expert on the guideline of the benefit price strategy.
    Extra Things:

    There are regulated prices that raise or brought down by the state. For open utility administrations like power, railroads, water, gas, interchanges, and so on., the state fixes their rates or prices on a no-benefit no-misfortune premise. The issue of how to deliver merchandise and ventures additionally understand incompletely by the price mechanism and mostly by the state. Also, the benefits rationale decides the methods of creation in the private segment.

    Simultaneously, the focal arranging authority intercedes and impacts the working of the market mechanism. The state directs and gives different offices to the private segment for embracing such strategies of creation which may diminish costs and amplify yield.

    It is the state which chooses where to utilize capital-serious strategies and where to utilize work concentrated procedures in the open area. The issue for whom to deliver additionally chose halfway by the market mechanism and mostly by the focal arranging authority. In the private division, it is the market mechanism that figures out what products and enterprises are to deliver based on buyer inclinations and wages.

    Since a blended economy targets accomplishing development with social equity, the designation of assets isn’t left totally. The state intercedes to dispense assets and for the dissemination of salary. For this reason, it embraces standardized savings projects and exacts dynamic expenses on salary and riches. In the open area, the state chooses for whom to create fully expecting shopper inclinations.

  • Market-Based Management: Meaning, Principles, and Dimensions!

    Market-Based Management: Meaning, Principles, and Dimensions!

    Market-Based Management is found on the principles that cause societies to become wealthy instead of mired in poverty. The Concept of the study Explains – Market-Based Management: Meaning of Market-Based Management, Principles of Market-Based Management, Ten-Points, and Dimensions of Market-Based Management. It seems the business as a small society with exceptional features requiring variation of the education drawn from society at large. Through this variation, an organization could build an MBM structure and ever-evolving mental models. Also learned, Market-Based Management: Meaning, Principles, and Dimensions!

    Explain and Learn, Market-Based Management: Meaning, Principles, and Dimensions!

    Market-Based Management is a holistic approach to an organization that incorporates theory and practice and organizes businesses to deal effectively with the challenges of change and growth. It also draws on the training learned from the failures and successes of individuals to attain prosperity, peace and organizational progress. Thus, it involves the study of the history of economics, politics, societies, cultures, governments, businesses, conflicts, science, non-profits and technology.

    Market-Based Management is the exceptional management tactic developed and executed by Koch Industries, Inc. It is a company philosophy that is embedded in the science of human action and functional through five dimensions: Vision, Knowledge Processes, Virtues and Talents, Decision Rights and Incentives. Koch Industries’ MBM Guiding Principles articulate the rules of just conduct and describe the main values which direct the day by day business activities.

    Meaning of Market-Based Management:

    MBM is an approach of philosophy which centers on using the tacit knowledge of workers to the benefit of the business. It stands on creating a situation where workers can feel secure to speak their opinions and questionable decision making because of the values and the culture permits it. Market-Based Management was based on the fact that capital, ideas, and talent are permissible to flow freely and is situated where it is most likely to produce wealth and innovation. This is unusual from the traditional company model where decision-making, knowledge, and resources are controlled centrally by a top management team.

    All gathered knowledge from the external settings is shared inside the business and utilized by workers involved in developing new services and products. Businesses need to decentralize decision-making in areas where the knowledge is situated rather than trying to move knowledge up the business for top management to make decisions with insufficient knowledge. Freedom of speech and action are important elements of a market economy, just as workers require experiencing the liberty to question and communicating improvements in their work environment

    The Principles of Market-Based Management:

    The ten guiding principles are the solution to the internal culture of a business: integrity – carry out all affairs lawfully and with great integrity, value creation – produce real, long-term value by moving on economic freedom. Recognize, develop, and apply Market-Based Management to get better outcomes and remove waste, compliance. Striving for 100% compliance on the part of employees, principled entrepreneurship. Show the sense of discipline, urgency, work ethic, judgment, accountability, economic and critical thinking skills, initiative, and the risk-taking attitude essential to create the greatest input to economic freedom, knowledge.

    Look for and use the most excellent knowledge in decisions making and proactively share the knowledge while accepting challenge, measure outcomes whenever practical, customer focus. Understand and build up associations with those who can most efficiently advance economic freedom, change. Embrace change; foresee what could be, test the status quo, and make inspired destruction, respect. Treat others with respect, dignity, honesty, and compassion. Be glad about the value of diversity.

    Support and observe collaboration, humility – practice intellectual honesty and modesty. Regularly seek to recognize and profitably deal with actuality to produce value and attain personal development, and fulfillment. Produce outcomes that produce value to understand the complete potential and find accomplishment in the work. When put into actions all these principles join to create a positive culture and a dynamic.

    There are ten-points principles of MBM:

    • Integrity: Conduct all affairs with integrity, for which courage is the foundation. Honor donor intent.
    • Compliance: Strive for 10,000% compliance with all laws and regulations, which requires 100% of employees fully complying 100% of the time. Stop, think, and ask.
    • Value creation: Contribute to societal well-being by advancing the ideas, values, policies, and practices of free societies. Understand, develop, and apply MBM to achieve superior results by making better decisions, eliminating waste, optimizing, and innovating.
    • Principled entrepreneurship: Apply the judgment, responsibility, initiative, economic and critical thinking skills, and sense of urgency necessary to generate the greatest contribution, consistent with the organization’s risk philosophy.
    • Customer focus: Discover, collaborate, and partner with those who can most effectively advance free societies.
    • Knowledge: Seek and use the best knowledge and proactively share your knowledge while embracing a challenging process. Develop measures that lead to more effective action.
    • Change: Anticipate and embrace change. Envision what could be, challenge the status quo, and drive creative destruction through experimental discovery.
    • Humility: Exemplify humility and intellectual honesty. Constantly seek to understand and constructively deal with reality to create value and achieve personal improvement. Hold yourself and others accountable.
    • Respect: Treat others with honesty, dignity, respect, and sensitivity. Appreciate the value of diversity, including, but not limited to, diversity in experiences, perspectives, knowledge, and ideas. Encourage and practice teamwork.
    • Fulfillment: Find fulfillment and meaning in your work by fully developing your capabilities to produce results that create the greatest value.

    The guiding principles of MBM are clearly linked to the tenets of the Austrian school of economics. The principles of integrity and respect tie into Hayek’s “rules of conduct” notion and the principle of knowledge can be paralleled to Hayek’s 1937 and 1945 essays on knowledge.  Under the broad notion of competition, the principles of entrepreneurship, value creation, and customer focus follow the economic theories of Schumpeter, Hayek, and Kirzner. Let us review the five dimensions of MBM.

    Dimensions of Market-Based Management:

    A business’s culture is the basis of victory, and a strong, flourishing workplace is a requirement of being able to explain problems using the five dimensions of Market-Based Management. By screening businesses throughout five special dimensions, problems are more simply detected and solved.

    The Five Dimensions of MBM:

    According to the Charles Koch Institute, there are five dimensions to MBM:

    1. Vision – Determining where and how the organization can create the greatest long-term value.
    2. Virtue and Talents – Helping ensure that people with the right values, skills, and capabilities are hired, retained, and developed.
    3. Knowledge Processes – Creating, acquiring, sharing, and applying relevant knowledge, and measuring and tracking profitability.
    4. Decision Rights – Ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable.
    5. Incentives – Rewarding people according to the value they create for the organization.

    They are – Vision – determining how and where the business can produce the most long-term worth. The development of a successful vision needs recognizing how a business can make better value for the client and most fully benefit from it. The procedure begins with a practical evaluation of the business’s core potential (new, improved or existing) and a preliminary determination of the chances for which these competencies can create the most worth. This preliminary determination must be established through the improvement of a point of view concerning what is going to occur in the industries where the business consider these chances exist.

    To be a truly successful business, one that stands and excels the test of time, virtue, as well as talent, must be highlighted. Virtue and talents help to ensure that individuals are with the correct skills, values, and capabilities are employed, retained, and developed. Businesses applying market-based management reward workers according to their virtue and their inputs.

    Businesses struggle to find individuals who can produce the most value through a variety of experience, perspectives, knowledge, and abilities. Diversity within a business is also significant to assist to improve understanding and relating to its clients and communities in this diverse world. The skill to create genuine value depends on an ethical, entrepreneurial culture in which the workers are passionate about finding.

    Although workers are chosen and kept on the basis of their beliefs and values, they must also have the required talent to produce outcomes. Virtue without the needed talent does not generate worth. But talent not including virtue is dangerous and can put the business and other workers at risk. Workers with inadequate virtue have done far more harm to businesses than those with inadequate talent.

    Market economies are flourishing, in large part, because they are better at creating helpful knowledge. Knowledge processes are market economies that make them mainly because they are well-equipped to produce useful knowledge. Acquiring, creating, sharing, and applying appropriate knowledge, and tracking and measuring profitability. The main methods of this knowledge creation are market signs from trade to prices, loss, and profit to and free speech.

    Businesses are most wealthy when knowledge is abundant, available, important, cheap and growing. Such situations are most fully brought about by trade. Knowledge increases success by indicating and guiding resources to most valued uses. Besides allowing producers to build goods that create better value for customers, new knowledge also assist producers to do so with the smaller amount of resources. The detection and application of knowledge directly to the enhanced use, consumption and of resources.

    Within a business, knowledge is necessary for creating better value for its clients and the business. A knowledge procedure is a way by which businesses develop, replace, apply and share knowledge to create value. To be successful in an uncertain future, a business must draw on the dispersed knowledge among its workers. It must also give them the confidence to find out new means to create value. Workers must innovate, not just in technology, but in all features and at all levels of the company.

    Decision rights are ensuring the correct individuals are in the right roles with the exact power to make decisions and holding them responsible. Decision rights should reproduce a worker’s established relative advantages. A worker has a relative advantage among a group of workers when he/she can carry out an activity more efficiently at a lesser opportunity cost than others. Decision rights constitute a worker’s liberty to act separately in carrying out the tasks of a given role.

    They normally take the form of limits for diverse types of capital expenditures, operating expenses and contractual commitments. The right to make some decisions, but not others, is supported on the degree to which a worker has established the skill to achieve outcomes in diverse areas. Decisions should be taken by workers with the best knowledge, taking the comparative advantage into consideration.

    Finally, incentives – gratifying people according to the value they generate for the business. These dimensions each offer a lens through which to be aware of and solve multifaceted obstacles that businesses face. For example, Koch industry used incentives to try to align the interests of every worker with the interests of the business.

    This means striving to pay workers a part of the value created. Profit is an influential incentive that motivates entrepreneurs to be aware and take risks to foresee and satisfy client demands. Finding less costly ways to make existing goods and developing new and improved ones is not only painful for the discovering entrepreneur, but it is also advantageous for business.

    However, there is the sixth dimension which is the brute physical force. The brute physical force dimension follows this basic pattern, first at the individual level; it is helpful to pump iron daily. At the organizational level, it is beneficial to strive to have employees whose standard shirt-collar size is in the low 20s, at least; and finally, at the societal level, wealth is usually increased.

    In order to completely capture the influence of market-based management, a business must not only keep away from fruitless tendencies but frequently strive to develop its capability to internalize and apply appropriate mental models. This needs the most complex and painful of all changes. Achieving such a change entails a prolonged and focused effort to build up new habits of the idea based on these mental models. Achievement in relating new mental models comes only after frequent practice.

    Market-Based Management_ Meaning Principles and Dimensions - ilearnlot

  • Commercial Bills: Meaning, Types, and Advantages

    Commercial Bills: Meaning, Types, and Advantages

    A Commercial Bill is one which arises out of a genuine trade transaction, i.e. credit transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the amount due. As well as discuss the Treasury Bills, this article explains Commercial Bills. The Commercial Bills explain in their key points; meaning, types, and advantages. The buyer accepts it immediately agreeing to pay the amount mentioned therein after a certain specified date. Thus, a bill of exchange contains a written order from the creditor to the debtor, to pay a certain sum, to a certain person, after a creation period. A bill of exchange is a “self-liquidating” paper and negotiable/it is drawn always for a short period ranging between 3 months and 6 months.

    Explain and Learn, Commercial Bills: Meaning, Types, and Advantages!

    Meaning of Commercial Bills Market:

    The commercial bills are issued by the seller (drawer) on the buyer (drawee) for the value of goods delivered by him. These bills are for 30 days, 60 days or 90 days maturity. If the seller needs funds, he may draw a bill and send it to the buyer for the seller needs funds, he may draw a bill and send it to the buyer for acceptance.

    The buyer accepts the bill and promises to make the payment on the due date. He may also approach his bank to accept the bill. The bank charges a commission for the acceptance of the bill and promises to make the payment if the buyer defaults. Once this process is accomplished, the seller can sell it in the market. This way a commercial bill becomes a marketable investment.

    Usually, the seller will go to the bank for discounting the bill. The bank will pay him after deducting the interest for the remaining period of the bill and service charges from the face value of the bill. The interest rate is called the discount rate on the bills. The commercial bill market is an important channel for providing short-term finance to business.

    However, the instrument did not become popular because of two factors:

    1. Cash credit scheme is still the main form of bank lending, and
    2. Big buyers in the corporate sector are still unwilling to the payment mode of commercial bills.

    Definition of Bill of Exchange:

    “An instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the beater of the instrument”.

    What is a Bill of Exchange?

    According to section 5 of the Negotiable Instruments Act, 1881, defines Bill Of Exchange as,

    “A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”

    A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount of any installment thereof being expressed to be on the lapse of certain period after the occurrence of a specified event which, according to the ordinary expectation of humanity, is certain to happen, although the time of its happening may be uncertain.

    The sum payable may be “certain”, within the meaning of this section and section and section 4, although it includes future indicated rater of change, or is according to the course of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.

    The person to whom it is clear that the direction is given or that payment is to make maybe a “certain person,” within the meaning of this section and section 4, although he misnames or designated by description only.

    Types of Commercial Bills:

    Many types of commercial bills are in circulation in a bills market. They can broadly classify as follows:

    Demand and Using Bills: 

    Demand bills are others call sight bills. These bills are payable immediately as soon as they present to the drawer. No time of payment specify and hence they are payable at sight. Using bills call time bills. These bills are payable immediately after the expiry of the period mentioned in the bills. The period varies according to the established trade custom or usage prevailing in the country.

    Clean Bills and Documentary Bills: 

    When bills have to be accompanied by documents of title to goods like Railways, receipt, Lorry receipt, Bill of Lading, etc. the bills call documentary bills. These bills can further classify into D/A bills and D/P bills. In the case of D/A bills, the documents accompanying bills have to deliver to the drawee immediately after acceptance. Generally, D/A bills draw on parties who have good financial standing.

    On the order hand, the documents have to hand over to the drawee only against payment in the case of D/P bills. The documents will retain by the banker. Till the payment of such bills. When bills are drawn without accompanying any documents they are called clean bills. In such a case, documents will be directly sent to the Drawee.

    Inland and Foreign Bills: 

    Inland bills are those drawn upon a person resident in India and are payable in India. Foreign bills draw outside India and they may be payable either in India or outside India. They may draw upon a person resident in India also. Foreign boils have their origin outside India. They also include bills draw on India make payable outside India.

    Export and Foreign Bills: 

    Export bills are those draw by Indian exports on importers outside India and import bills draw on Indian importers in India by exports outside India.

    Indigenous Bills: 

    Indigenous bills are those draw and accept according to native custom or usage of trade. These bills are popular among indigenous bankers only. In India, they call “Hundis” the Hundis knows by various names such as – Shah Jog, Nam Jog, Jokhani, Termainjog, Darshani, Dhanijog, and so on.

    Accommodation Bills and Supply Bills: 

    If bills do not arise out of genuine trade transactions, they call accommodation bills. They know as “kite bills” or “wind bills”. Two parties draw bills on each other purely for mutual financial accommodation. These bills are discount with bankers and the proceeds are sharing among themselves. On the due dates, they are paying.

    Supply bills are those neither draw by suppliers or contractors on the government departments for the goods nor accompanied by documents of title to goods. So, they do not consider as negotiable instruments. These bills are useful only to get advances from commercial banks by creating a charge on these bills.

    Operations in Commercial Bills Market:

    From the operations point of view, the bills market can classify into two viz.

    • Discount Market
    • Acceptance Market
    Discount Market:

    Discount market refers to the market where short-term genuine trade bills discounts by financial intermediaries like commercial banks. When credit sales affect, the seller draws a bill on the buyer who accepts it promising to pay the specified sum at the specified period. The seller has to wait until the maturity of the bill for getting payment. But, the presence of a bill market enables him to get paid immediately.

    The seller can ensure payment immediately by discounting the bill with some financial intermediary by paying a small amount of money called “Discount rate” on the date of maturity, the intermediary claims the amount of the bill from the person who has accepted the bill. In some countries, some financial intermediaries specialize in the field of discount.

    For instance, in the London Money Market, there are specializing in the field discounting bills. Such institutions are conspicuously absent in India. Hence, commercial banks in India have to undertake the work of discounting. However, the DFHI has been establishing to activate this market.

    Acceptance Market:

    The acceptance market refers to the market where short-term genuine trade bills accept by financial intermediaries. All trade bills cannot discount easily because the parties to the bills may not be financially sound. In case such bills accept by financial intermediaries like banks, the bills earn a good name and reputation and such bills can readily discount anywhere.

    In London, there are specialist firms call acceptance house which accepts bills draw by trades and import greater marketability to such bills. However, their importance has declined in recent times. In India, there are no acceptance houses. The commercial banks undertake the acceptance business to some extent.

    Advantages of Commercial Bills:

    Commercial bill market is an important source of short-term funds for trade and industry. It provides liquidity and activates the money market. In India, commercial banks lay a significant role in this market due to the following advantages:

    Liquidity:

    Bills are highly liquid assets. In times of necessity, bills can convert into cash readily using rediscounting them with the central bank. Bills are self-liquidating in character since they have fixed tenure. Moreover, they are negotiable instruments and hence they can transfer freely by mere delivery or by endorsement and delivery.

    The certainty of Payment:

    Bills draw and accept by business people. Generally, business people use to keeping their words and the use of the bills imposes strict financial discipline on them. Hence, bills would honor on the due date.

    Ideal Investment:

    Bills are for periods not exceeding 6 months. They represent advances for a definite period. This enables financial institutions to invest their surplus funds profitably by selecting bills of different maturities. For instance, commercial banks can invest their funds on bills in such a way that the maturity of these bills may coincide with the maturity of their fixed deposits.

    In the case of the bills dishonor, the legal remedy is simple. Such dishonor bills have to simply note and protest and the whole amount should debit to the customer’s accounts.

    High and Quick Yield:

    The financial institutions earn a high quick yield. The discount dedicates at the time of discounting itself whereas, in the case of other loans and advances, interest is payable only when it is due. The discounts rate is also comparatively high.

    Easy Central Bank Control:

    The central bank can easily influence the money market by manipulating the bank rate or the rediscounting rate. Suitable monetary policy can take by adjusting the bank rate depending upon the monetary conditions prevailing in the market.

    Commercial Bills_ Meaning Types and Advantages - ilearnlot
    Commercial Bills: Meaning, Types, and Advantages.

    Drawbacks of Commercial Bills:

    In spite of these merits, the bills market has not been well developing in India. The reasons for the slow growth are the following:

    The Absence of Bill Culture:

    Business people in India prefer O.D and cash credit to bill financing, therefore, banks usually accept bills for the conversion of cash credits and overdrafts of their customers. Hence bills are not popular.

    The absence of Rediscounting Among Banks:

    There is no practice of re-discounting of bills between banks who need funds and those who have surplus funds. To enlarge the rediscounting facility, the RBI has permitted financial institutions like LIC, UTI, GIC, and ICICI to rediscount genuine eligible trade bills of commercial banks. Even then, bill financial is not popular.

    Stamp Duty:

    Stamp duty discourages the use of bills. Moreover, stamp papers of the required denomination are not available.

    The Absence of Secondary Market:

    There is no active secondary market for bills. The rediscounting facility is available in important centers and that too restrictive to the apex level financial institutions. Hence, the size of the bills market has been curtail to a large extent.

    Difficulty in Ascertaining Genuine Trade Bills:

    The financial institutions have to verify the bills to ascertain whether they are genuine trade bills and not accommodation bills. For this purpose, invoices have to scrutinize. It involves additional work.

    Limited Foreign Trade:

    In many developed countries, bill markets have been establishing mainly for financing foreign trade. Unfortunately, in India, foreign trade as a percentage to national income remains small and it is reflected in the bill market also.

    The Absence of Acceptance Services:

    There is no discount house or acceptance house in India. Hence specialized services are not available in the field of discounting or acceptance.

    The attitude of Banks:

    Banks are shy about rediscounting bills even the central bank. They tend to hold the bills till maturity and hence it affects the velocity of the circulation of bills. Again, banks prefer to purchase bills instead of discounting them.

  • The relationship between Economic and Market Value Added!

    Whether a company has positive or negative Market Value Added (MVA)  depends on the level of rate of return compared to the cost of capital. All this applies to Economic Value Added (EVA) also. Stewart has defined the relationship between EVA and MVA. When a business earns a rate of return higher than its cost of capital, EVA is positive. In other words, investors are earning more than their investment in that business than they could elsewhere. In response, investors bid up share prices, increasing the value of their business and driving up its MVA. Similarly, investors discount the value of businesses that earn a return below their cost of capital. Also learned, The relationship between Economic and Market Value Added!

    Learn, Explain The relationship between Economic and Market Value Added! 

    Thus, MVA is an estimate made by the investors of the net present value of all current and expected future investments in the business. In other words, it can be said that MVA is same as NPV and can be calculated as the present values of all future EVAs. Similarly, it can be the present value of future free cash flows, because discounted EVA and discounted free cash flows are mathematical equivalents.

    What Does Economic Value Added (EVA)?

    What is the definition of economic value added? EVA compares the rate of return on invested capital with the opportunity cost of investing elsewhere. This is important for businesses to keep track of, particularly those businesses that are capital intensive. When calculating economic value added, a positive outcome means that the company is creating value with its capital investments.

    Definition: Economic value added (EVA) is a financial measurement of the return earned by a firm that is in excess of the amount that the company needs to earn to appease shareholders. In other words, it is a measure of an organization’s economic profit that takes into account the opportunity cost of invested capital and ultimately measures whether the organizational value was created or lost.

    What Does Market Value Added Mean?

    What is the definition of market value added? MVA is a vital concept that investors use to gauge how well the company has been using its capital. The state of MVA, either positive or negative, can reinforce or undermine the company’s current direction. If it is negative, the firm might decide to change directions in favor of a more value-oriented approach. Also, negative MVA signals to investors that the company is not using its capital effectively or efficiently. Thus, it’s not a good investment.

    Definition: Market value added (MVA) is a financial calculation that measures the capital that investors have contributed to a company in excess of the market value of the company. In other words, it measures if the firm has created positive value or destroyed value from its investors.

    From the definition of Market Value Added (MVA), the value of the firm can be expressed as Market Value = Capital + MVA of the firm.

    However, MVA is the present value of all future EVAs. Therefore, the value of the firm can be expressed as the sum of its capital; current EVA capitalized as perpetuity and the present value of all the expected future EVA improvements.

    Market Value = Capital + Value of current EVA as perpetuity+ Present value of expected EVA Improvement

    Since market value is dependent on the market implications of all future performance, market values are sensitive to the changes in current EVA as well as expected EVA improvement. This results in an interesting problem for the management. They need to decide the level of focus on generating current results and future prospects. The solution seems to be clear. Management must focus on producing the best results today a while making significant efforts for the future simultaneously. The stress has to be in the long term and short term perspective both.

    In a nutshell, the relationship between Economic Value Added (EVA) and Market Value Added (MVA)  can be summarized as follows:

    • The relationship between EVA and MVA is more complicated than the one between EVA and The firm value.
    • MVA of a firm reflects not only expected EVA of assets in place but also expected EVA from future projects.
    • To the extent that the actual EVA is smaller than expected EVA, the market value can decrease even if EVA is higher.

    Market Value Added (MVA)  is, thus, in a way best performance measure because it focuses on cumulative value added or lost on invested capital. It is the difference between the capital investors have put in business (cash in) and the value they could get by selling their claims (cash out). It is a focus on wealth in dollar or rupees rather than the rate of return in percentage. It, therefore, recognizes all value-adding investments even if than original rate of return.

  • What is MVA (Market Value Added)?

    Learn, Explain What is MVA (Market Value Added)? 

    Economic Value Added (EVA) is aimed to be a measure of the wealth of shareholders. According to this theory, earning a return greater than the cost of capital increase value of company while earning less than the cost of capital decreases the value. For listed companies, Stewart defined another measure that assesses if the company has created shareholder value or not. Also Learned, EVA, What is MVA (Market Value Added)?

    If the total market value of a company is more than the amount of capital invested in it, the company has managed to create shareholder value. However, if market value is less than capital invested, the company has destroyed shareholder value. The difference between the company’s market value and book value is called Market Valued Added or MVA.

    From an investor’s point of view, Market Value Added (MVA) is the best final measure of a Company’s performance. Stewart states that MVA is a cumulative measure of corporate performance and that it represents the stock market’s assessment from a particular time onwards of the net present value of all a Company’s past and projected capital projects. MVA is calculated at a given moment, but in order to assess performance over time, the difference or change in MVA from one date to the next can be determined to see whether the value has been created or destroyed.

    The Market Value Added (MVA) measure is based on the assumption that the total market value of a firm is the sum of the market value of its equity and the market value of its debt. Stewart defines Market Value Added (MVA) as the excess of market value of capital (both debt and equity) over the book value of capital.

    Simply stated, Market Value Added (MVA) = Market value of the company – Capital invested in the company

    Where,

    • Market value: For a public listed company it is calculated as the number of shares outstanding x share price + book value of debt (since the market value of debt is generally not available). In order to calculate the market value of a firm, we have to value the equity part at its market price on the date the calculation is made. The total investment in the Company since day one is then calculated as the interest-bearing debt and equity, which includes retained earnings. Present market value is then compared with total investment. If the former amount is greater than the latter, the Company has created wealth.
    • Capital invested: It is the book value of investments in the business made up of debt and equity.

    Effectively, the formula becomes, Market Value Added (MVA) = Market value of equity – Book value of equity

    According to Stewart, Market Value Added (MVA) tells us how much value company has added to or subtracted from its shareholder’s investments. Successful companies add their MVA and thus, increase the value of capital invested in the company. Unsuccessful companies decrease the value of capital originally invested in the company. Whether a company succeeds in creating MVA (increasing shareholder value) or not, depends on its rate of return. 

    If a company’s rate of return exceeds its cost of capital, the company will sell on stock markets with premium compared to the original capital and thus, have positive MVA. On the other hand, companies that have the rate of return smaller than their cost of capital, sell with discount compared to the original capital invested in the company.

    Market Value Added (MVA) is a cumulative measure of corporate performance and that it represents the stock markets assessments from a particular time onwards of the net present value of all of a Company’s past and projected capital projects. The disadvantage of the method is that like EVA there can be a number of value-based adjustments made in order to arrive at the economic book value and that it is affected by the volatility from the market values since it tends to move in tandem with the market.

  • What is Foreign Exchange Market or Forex Market?

    What is Foreign Exchange Market or Forex Market?

    A Foreign exchange market or Forex market is a market in which currencies are bought and sold. It is to distinguish from a financial market where currencies borrow and lent. This market determines the foreign exchange rate. It includes all aspects of buying, selling, and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market. Also learned, Goods and Services Tax, What is Foreign Exchange Market or Forex Market?

    Learn and Study, What is Foreign Exchange Market or Forex Market?

    The foreign exchange market (Forex, FX, or currency market); a global decentralized or over-the-counter (OTC) market for the trading of currencies.

    Definition of Foreign Exchange Market:

    It is a market where the buyers and sellers involving in the sale; and, purchase of foreign currencies. In other words, a market where the currencies of different countries are bought and sold calls a foreign exchange market.

    The structure of the foreign exchange market constitutes central banks, commercial banks, brokers, exporters and importers, immigrants, investors, tourists. These are the main players of the foreign market, their position, and place shown in the figure below.

    At the bottom of a pyramid are the actual buyers; and, sellers of the foreign currencies- exporters, importers, tourists, investors, and immigrants. They are actual users of the currencies and approach commercial banks to buy them.

    The commercial banks are the second most important organ of the foreign exchange market. The banks dealing in foreign exchange play a role of “market makers”; in the sense that they quote daily the foreign exchange rates for buying and selling of foreign currencies. Also, they function as clearinghouses; thereby helping in wiping out the difference between the demand for and the supply of currencies. These banks buy currencies from the brokers and sell them to the buyers.

    Other things:

    The third layer of a pyramid constitutes the foreign exchange brokers. These brokers function as a link between the central bank and the commercial banks; and, also between the actual buyers and commercial banks. They are the major source of market information. These are the persons who do not themselves buy the foreign currency; but rather strike a deal between the buyer and the seller on a commission basis.

    The central bank of any country is the apex body in the organization of the exchange market. They work as the lender of the last resort and the custodian of foreign exchange of the country. Also, the central bank has the power to regulate and control the foreign exchange market to assure that it works in an orderly fashion. One of the major functions of the central bank is to prevent the aggressive fluctuations in the foreign exchange market, if necessary, by direct intervention. Intervention in the form of selling the currency when it overvalues and buying it when it tends to undervalue.

    General Features of Forex Market:

    They describe it as an OTC (Over the counter) market as there is no physical place where the participants meet to execute their deals. It is more an informal arrangement among the banks and brokers operating in a financing center purchasing and selling currencies, connected by telecommunications like telex, telephone, and a satellite communication network, SWIFT (Society for Worldwide Interbank Financial Telecommunication).

    The term foreign exchange market uses to refer to the wholesale segment of the market, where the dealings take place among the banks. Also, the retail segment refers to the dealings that take place between banks and their customers. Also, the retail segment refers to the dealings that take place between banks and their customers. The retail segment situates in a large number of places. They can consider not as foreign exchange markets, but as the counters of such markets.

    The leading foreign exchange market in India is Mumbai, Calcutta, Chennai, and Delhi is other center’s accounting for the bulk of the exchange dealings in India. The policy of the Reserve Bank has been to decentralize exchange operations and develop broader-based exchange markets. As a result of the efforts of Reserve Bank Cochin, Bangalore, Ahmadabad, and Goa have emerged as the new center of the foreign exchange market.

    Size of the Market:

    It is the largest financial market with a daily turnover of over USD 2 trillion. Also, Foreign exchange markets were primarily developed to facilitate the settlement of debts arising out of international trade. But these markets have developed on their own so much so that a turnover of about 3 days in the foreign exchange market is equivalent to the magnitude of world trade in goods and services.

    The largest foreign exchange market in London was followed by New York, Tokyo, Zurich, and Frankfurt. As well as, the business in foreign exchange markets in India has shown a steady increase as a consequence of the increase in the volume of foreign trade of the country, improvement in the communications systems, and greater access to the international exchange markets. Still, the volume of transactions in these markets amounting to about USD 2 billion per day does not compete favorably with any well developed foreign exchange market of international repute.

    The reasons are not far to seek. Also, the rupee is not an internationally traded currency and is not in great demand. Much of the external trade of the country designated in leading currencies of the world, Viz., US dollar, pound sterling, Euro, Japanese yen, and Swiss franc. Incidentally, these are the currencies that trade actively in the foreign exchange market in India.

    24 Hours Market:

    The markets are situated throughout the different time zones of the globe in such a way that when one market is closing the other is beginning its operations. Thus at any point in time one market or the other is open. Therefore, it states that the foreign exchange market is functioning 24 hours of the day.

    However, a specific market will function only during business hours. Some of the banks having the international network and having centralized control of funds management may keep their foreign exchange department in the key center open throughout to keep up with developments at other centers during their normal working hours. In India, the market is open for the time the banks are open for their regular banking business. No transactions take place on Saturdays.

    Efficiency:

    Developments in communication have largely contributed to the efficiency of the market. Also, the participants keep abreast of current happenings by access to such services as Dow Jones Telerate and Teuter.

    Any significant development in any market is almost instantaneously received by the other market situated at a far off place and thus has a global impact. This makes the foreign exchange market very efficient as if the functions under one roof.

    Currencies Traded in Forex Markets:

    In most markets, the US dollar is the vehicle currency, Viz., the currency used to denominate international transactions. This is even though with currencies like the Euro and Yen gaining a larger share, the share of the US dollar in the total turnover is shrinking.

    Physical Markets:

    In few centers like Paris and Brussels, foreign exchange business takes place at a fixed place, such as the local stock exchange buildings. At these physical markets, the banks meet and in the presence of the representative of the central bank and based on bargains, fix rates for several major currencies. This practice calls fixing.

    The rates thus fixed uses to execute customer orders previously placed with the banks. An advantage claimed for this procedure is that the exchange rate for commercial transactions will market-determine, not influence by any one bank. However, it observes that the large banks attending such meetings with large commercial orders backing up, tend to influence the rates.

    What is Foreign Exchange Market or Forex Market - ilearnlot
    What is Foreign Exchange Market or Forex Market?