CHAPTER

An overview of capital and commodity market.

Introduction.

Any economy in the world cannot function unless there is a well- developed financial
systems. Financial systems facilitates the transfer of economic resources from one section of
the economy to another.
The financial systems performs the following functions

1. It serves as a link between savers and investors. It channelizes flow of savings into
Productive investment.
2. It assist in the selection of the projects to be financial an also reviews the performance of such
projects periodically.
3. It provides a payment mechanism for the exchange of goods and services.
4. It provides a mechanism for the transfer of resources across geographic boundaries.
5. It promotes the process of capital formation by bringing together the supply of savings and the
demand for investable funds.

Financial Market (FM)

A market is place or mechanism which facilitates the transfer of resources from one entity to
another. The transfer market is an institution or arrangement that facilitates the exchange of
financial instruments. Like shares debentures and loan etc. A market where in financial
instruments are traded is known as a financial markets.

Role of financial markets.

1. Transfer of resources:- FM facilitates the transfer of resources from one person to

another.
2. Productivity usage: - Financial markets allow for the productive use of the funds in
financial system thus enhancing the income and gross national production.
3. Growth in income:- Financial markets allow lenders earn
4. Capital formation: -A channel through which savings low to aid capita formation of a
country.
5. Price discovery: - FM allow for the determination of the price of the traded financial assets
through the interactions of different set of participants.

Functions of Financial Market (I. Economic function)

(a) To facilitates
(b) To serve as intermediaries for mobilisation of savings
(c) To assist the process of balance economic growth
(d) To provide financial convenience.
(e) To cater the various credit needs of the business houses
(f) It provides a channel through which new savings flow in to capital market which
facilitates smooth capital formation in economy.

Financial function

 It provides the borrowers with funds which they will invest in some productive purpose.
 It provides lenders with productive assets so that they can invest it in productive usage
without the necessity of direct ownership assets.
 It provides liquidity in the market through which the claims against money can be resoldby
investors at any time and there by assets can be converted in to cash.

Money market

The term money does not refer any particular place or office where money is brought (borrowed)
and sold. It refers to an activity

That is borrowing and lending of short term funds against short term credit instruments such as
treasury bills, Bills of exchange, banker‘s acceptances short term Govt securities etc.

Characteristics of money market (MM)

(a) MM is concerned with borrowing and lending of short term funds only.
(b) For the borrowing and lending of funds, it is not necessary that the borrower and the
lender should meet each other face to face at a particular place. They can carryon
negotiations and effect their financial transactions through telephone ,telegram ,mail
or any other means of communication
 (c) Short term credit instruments like bills of exchange, treasury bills etc. are also dealt with
in a money market
(d) MM is a single homogenous market.it composed of several specialised sub markets such
as (1).call money market.(2) T. bill market.(3)Discount market.(4) collateral loan market.
(e) There are large number of borrowers and lenders in the money in the money market.
(f) Large volume of short term funds is traded in money market.
(g) As in any other market in the MM also there is a price for the money borrowed and lent
that price called interest.
(h) MM is the source of working capital finance.
(i) There are various instruments of MM. they are
(a) Call money (inter bank loan)
(b) Certificate of deposits(time deposit)
(c) Treasury bill of the Govt. trade bills of commercial papers promissory notes by
reputing co.‘s
(j) Dealers in MM are lenders( He supplies of short term funds) like;-
(1) Central Bank
(2) Commercial Bank

Functions of money market

(1) It provides an outlet to commercial banks for the employment of their shout term funds.
(2) It offers a channel to non-banking financial institutions such as Co‘s, financial houses etc.
for the investment of their short term funds.
(3) It provides short term funds to industrialists to meet their requirements of working capital.
(4) It helps the Govt to raise the necessary short-term funds through the issue of treasury bills
or short-term loans.
(5) It serves as a medium through which the central back of a country can exercise its control
over the creation of credit.

Capital market
Capital market refers to the institution and mechanism for the effective pooling of long-term
funds from the investing parties. In short – It is the market which deals in shares, debentures,
bonds and securities.
Features of capital market

(1) Capital markets deals in Long-term and medium-term funds.

(2) It concerned with the transfer of long-term and medium-term funds from investing parties
to industrial and commercial enterprises.
(3) Ownership securities: Equity shares.
Credlitorship Securities like Debentures & bonds are dealt in capital market.
(4) Capital market is composed of new securities market (primary market), stock Market
(Secondary market) and Special Financial institutions.
(5) The deals in the capital market are the industrial and commercial enterprises are the
investors like individual and institutional investors.