Question No. 3 - MCO-04 - BUSINESS ENVIRONMENT - Master of Commerce (M.Com) - 2nd Year

Solutions to Assignments 

MCO-04 - BUSINESS ENVIRONMENT

Master of Commerce (M.Com) - 2nd Year

Question No. 3

Distinguish between the following: 

(a) Primary capital market and Secondary capital market 

S.NO.	PRIMARY MARKET	SECONDARY MARKET
1.	A primary market is defined as the market in which securities are created for first-time investors.	On the other hand, the secondary market is defined as a place where the issued shares are traded among investors.
2.	The company issues the shares, and the government interferes in the process.	There is no interference of the government or the company.
3.	The primary market is called as a new issue market.	The secondary market is an aftermarket.
4.	The buying and selling of shares takes place among the investors and the companies.	The trading take place only among the investors.
5.	The primary market provides finance to the companies who want expansion and growth.	The secondary market does not provide financing to the companies.
6.	Underwriters are involved in the intermediary process.	Brokers are involved in the intermediary process.
7.	The prices in the primary market do not fluctuate, i.e., they are fixed.	On the other hand, the prices fluctuate a lot in the secondary market because of the demand and supply.
8.	The products in a primary market are limited, i.e., they include IPO and FPO.	Shares, debentures, warrants, derivatives, etc., are the kind of products offered in the secondary market.
9.	The purchase process happens directly in the primary market.	The company issuing the shares do not involve in the purchasing process.
10.	The frequency of buying and selling is limited, i.e., the investors can invest once in the market.	On the other hand, the frequency of buying and selling is quite high, i.e., the investors can trade as many times as they wish to.
11.	The beneficiary in the primary market is the company.	The beneficiary in the secondary market is the investor.
12.	The primary market is not organized.	The secondary market has an organized setup.
13.	The companies issuing shares and debentures have to follow all regulations.	The investors in the secondary market follow the rules provided by the stock exchanges and the government.
14.	The major disadvantage of the primary market is that it is very time-consuming and costly.	The major disadvantage of the secondary market is that the investors can incur huge losses due to price fluctuation.

So, these are some of the significant contrasting points between the primary market and the secondary market. It is essential to note that both primary and secondary markets help in earning profits and providing funds to the companies and investors.

(b) Speculative Transaction and Investment transaction 

Critical Differences Between Investment and Speculation

1. An investment involves an asset with the hope of securing returns over the principal amount in the future. On the other hand, speculation involves conducting a risky financial transaction to make large-scale gains from a single transaction.

2. Investments are generally held for an extended period, usually more than a year. Instances like real estate and life insurance are held for 25-30 years. Speculation is held for a brief period, usually less than a year, and can even be on a forthcoming event.

3. The amount of risk assumed is relatively moderate as compared to speculation. Speculation will focus on getting high returns in a relatively shorter amount of time, and thus, the quantum of risk is very high. Since investment is mainly made by the middle class working for the community, they would be putting the spare money off their hard work, which they expect to earn a stable return. They are ready to part with their savings if it offers a definite return.

4. An investor will be using their funds for investing, whereas speculators will use borrowed funds and lure the borrowers with attractive returns.

5. The above point also reflects the attitude of the investors and speculators. Investors will generally follow a cautious and conservative approach while considering the investment and the risk appetite

 they can absorb. Speculators believe in an aggressive approach highlighting attack but careless attitude. As the returns are far too attractive, and the window of opportunity is very small, this behavior will easily get reflected.

6. Investors expect to profit from the change in the value of an asset, whereas speculators focus on extracting profits from price changes due to demand and supply forces.

7. While making decisions, investors will conduct extensive research and focus on the fundamental factors of the company, such as the financial position, ratio analytics, etc. In contrast, speculative decisions are based on technical charts, market dynamics, and personal opinions/tips received.

8. The avenues for considering investment will focus on the Blue chip companies of the stock market, savings bank accounts, provident funds, etc. Still, speculators will focus on the commodity market, options trading, betting, etc.

9. Investment does not give rise to practices such as insider trading or possible leakage of information, which can be observed in speculative activities since their returns are lucrative.

10. The level of patience and sacrifice is relatively large in the case of investment but not in the case of speculation. However, the probability of losses does multiply in speculative activities.

11. Investment activities are recorded separately in a firm’s balance sheet of a firm , but speculation is not recorded separately. Depending on the returns that they offer, such activity may either be classified under-investment or the category of ‘Other Assets / Miscellaneous Income.’

12. The amount of money for investing activities is relatively less and depends on the ability of the individual/ organization, but speculation requires large funds for executing the activities.

SPECULATION	INVESTMENT
Meaning
Executing a dangerous monetary exchange or venture or investment with the assumption for high benefit making that can go wayward.	Purchasing of a share or an asset or anything for getting steady returns or benefits.
Investors’ Point of View
Indiscreet and forceful conduct.	Wary and helpful.
Presumption of the Returns
An undeniable degree of profits and benefits with high disappointment is the likelihood.	Unassuming and nonstop with a low likelihood of disappointment.
Level of Risk
The risk and likelihood of disappointment are high in speculation.	The gamble level is moderate in contributing.
Similitude
The reason for speculating is additionally to acquire high benefits.	The principal point of putting is to acquire benefits later on.
Time Horizon or Duration
Speculations are like shortcuts and take less time to give outcomes. But these outcomes can go one way or another.	Venture takes significant stretches to give results.
Examples
Betting, momentum contributing, development stocks, foreign monetary standards, digital forms of money.	The financial exchange, saving accounts, Government securities, factor contributing, shared assets, and so on.

The history of the business market has numerous instances of burst bubbles that had critical monetary ramifications for individuals who decided to estimate on any expectations or speculate of consistently expanding stock costs and speedy wealth. Investing is generally not quite the same as speculation. At times speculative choices are expected to support the benefits of a business.

Yet, with the increment of speculative exchanges, the risk factor likewise increments. Knowing the distinction between speculation and investment is vital for your business and benefit-making. Doing one’s own statistical surveying and assessment work, depending on decisive reasoning, and addressing the tried and true way of thinking is the most ideal choice that can work for an individual.

(c) Budla system and Equity derivative

Distinction between Budla System and Equity Derivatives

The settlement system in specified securities providing for carry forward of transactions from one

settlement day to another has been known as budla system and the charges paid for carry forward

termed as budla charges (contango or backwardation) the amount of which depended upon the

class of security, its quantity, the amount involved and the interest rate prevailing in the market at

the time of the transaction. All along, it had been felt that this system led to excessive speculation

and, at times, to certain malpractices like price rigging, evasion of margins, and non-reporting of

transactions. Hence, it was abolished in December, 1993. This led to a halt in trading of specified

securities with carry over facilities and sharp decline in turnover on the stock markets resulting in a

liquidity crunch. So, efforts were made to reintroduce the system in its revised and modified form

subject to certain conditions and precautions. But, somehow, they did not click because of the

inherent weaknesses of the system and a clamour for adopting other risk hedging devices. The

experts preferred equity derivatives, in the form of futures and options as prevalent in advanced

countries. As a result, in June 2000, index futures were launched at BSE and NSE followed by its

other variants like index options, stock futures and stock options. It may be noted that NSE

accounts for more than 90 per cent of India's equity derivatives volume which is largely due to its

effective monitoring, surveillance, netting timely settlement and minimisation of settlement risks

with the help of National Securities Clearing Corporation Ltd. (SSCCL) which offers high quality

risk mitigation in settlement.

It may be noted that options are not all like budla. An option refers to a contract which gives the

investor (its holder) a right, not the obligation, to buy or sell the specified quantity of a share at a

specified price on or before a specified time called expiry date. However, future may seem like

budla to some as just like a forward contract, it is a contractual obligation to buy or sell a standard

quantity of a share at an agreed price at a future date. But, unlike budla where cash market and all

future prices are mixed up in one price, the future markets trade differ from the cash market sc that

each future prices and cash prices are different. Future markets, also do not have any counter

party risk through the institution of the clearing house which guarantees the trade coupled with

margining. This eliminates the risk premium which is embedded inside budla financing charges. Moreover, in case of budla expiration date is unclear moving from one settlement date to another,

while in case of futures the expiration date is predetermined and the holder is under obligation to

settle the transaction.