INTRODUCTION TO

FINANCIAL SYSTEM
 Functions of Financial System
• Link the savers and investors
• Selecting projects to be funded & monitor
performance
• Payment mechanism
• Optimum allocation of risk bearing
• Makes available price-related information
• Provides financial services
• Creation of financial structure
• A well-functioning fianacial system helps in
promoting the process of financial deepening and
broadening.
Components of Finansial System
• Regulators
• Financial Intermediaries
• Financial Markets
• Financial Instruments
• Financial Services
FINANCIAL MARKETS
 Types
• Money Market
Functions:
1. to serve as an equilibrating force that redistributes cash
balances in accordance with the liquidity needs of the
participants
2. to form a basis for the management of liquidity and money
in the economy by monetary authorities
3. to provide a resonable access to the users of short-term
money for meeting their requirements at realistic prices
As it facilitates the conduct of monetary poilcy, a money
market constitutes a very important segment of the
financial system.
• Capital Market
Functions:
1. mobilize long-term savings to finance long-term
investments;
2. provide risk-capital in the form of equity or quasi-
equity to entrepreneurs;
3. encourage broader ownership pf productive assets;
4. provide liquidity with a mechanism enabling the
investor to sell financial assets;
5. lower the costs of transactions and information;
6. improve the efficiency of capital allocation through a
competitive pricing mechanism
• Capital Market Instruments in India
1. Equity/Ordinary Shares
2. Preference Shares
3. Debentures/Bonds/Notes
4.Innovative Debt Instruments
• Convertible Debentures/ Bonds
• Callable/Puttable Bonds
• Zero Interest Bond
• Deep Discount Bonds
• Secured Premium Notes
• Floating Rate Bonds
Stock Exchanges & Stock
Market Index
 Stock Exchange
• Organization Structure
• Departments
• Bombay Stock Exchange (BSE)
• National Stock Exchange
• Over The Counter Excahnge of India
• Regional Exchanges in India
• Interconnected Stock Exchange of India
• Indonext
 Stock Market Index
• Methodologies for calculating the Index
1. Market Capitalisation Weighted
(a) Full market capitalisation method
(b) Free-float market capitalisation method
© Modified capitalisation weighted
2. Price Weighted Index
3. Equal Weighting
• Indian & Global Stock Market Indices
1. BSE – SENSEX, 100 Index, 500 Index
• 2. NSE – S&P CNX NIFTY
3. Dow Jones Industrial Average
4. NASDAQ – Composite Index and 100 Index
5. S&P 500 Index
6. Hang Seng
7. KOSPI
Equity Market – Primary Market
 Types of Issue
• IPO
• FPO
• Offer for Sale
• Right Issue
• Bonus Issue
 Methods of Issues
• Pure Prospectus Method

Fixed Price Method

Book Building Method


Private Placement


Bought-out Deals
Intermediaries in Primary Market
• Merchant Bankers/Lead managers
• Underwriters
• Bankers to an Issue
• Brokers to the Issue
• Registrars to an Issue & Share Transfer
Agents
• Debenture Trustees
Equity Market – Secondary
Market
• Security listing

Trading Mechanism

Jobbers, Brokers and Sub-Brokers

Types of Transactions in a Stock
Exchange

Types of Orders

Margin Trading

Short Selling and Securities Lending
and Borrowing Scheme, 2008

Settlement

Internet Trading

Depositories – CDSL & NSDL,
Depositories Participants