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QUEENS’ COLLEGE, INDORE

INTRO. TO FIN. MARKET WORKSHEET – 1 (No. of Pages – 6)


CLASS – XI – TYPES OF MARKET
The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read
about Money and banking in Economics, about Monetary Theory and Practice and about "Public
Finance". But finance exactly is not money, it is the source of providing funds for a particular
activity. Thus public finance does not mean the money with the Government, but it refers to
sources of raising revenue for the activities and functions of a Government. Here some of the
definitions of the word 'finance', both as a source and as an activity i.e. as a noun and a verb.
The American Heritage® Dictionary of the English Language, Fourth Edition defines the term as
under-
1:"The science of the management of money and other assets.";
2: "The management of money, banking, investments, and credit. ";

INDIAN FINANCIAL SYSTEM


The economic development of a nation is reflected by the progress of the various economic units,
broadly classified into corporate sector, government and household sector. While performing
their activities these units will be placed in a surplus/deficit/balanced budgetary situations.
There are areas or people with surplus funds and there are those with a deficit. A financial system
or financial sector functions as an intermediary and facilitates the flow of funds from the areas of
surplus to the areas of deficit. A Financial System is a composition of various institutions,
markets, regulations and laws, practices, money manager, analysts, transactions and claims and
liabilities.
Financial System

The word "system", in the term "financial system", implies a set of complex and closely
connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities
in the economy. The financial system is concerned about money, credit and finance-the three
terms are intimately related yet are somewhat different from each other. Indian financial system
consists of financial market, financial instruments and financial intermediation. These are briefly
discussed below;

FINANCIAL MARKETS
A Financial Market can be defined as the market in which financial assets are created or
transferred. As against a real transaction that involves exchange of money for real goods or
services, a financial transaction involves creation or transfer of a financial asset. Financial Assets
or Financial Instruments represents a claim to the payment of a sum of money sometime in the
future and /or periodic payment in the form of interest or dividend.

Prepared by – SUDHIR SINGHAI 1


Types of Financial Market
(1) Money Market
(2) Capital Market
(a) Securities Market
(i) Primary Market
(ii) Secondary Market
a) Spot Market
b) Forward Market
i) Future Market
ii) Options Market
1) Put option
2) Call option
(b) Non Securities Market
MONEY MARKET
The money market is a wholesale debt market for low-risk, highly-liquid, short-term instrument.
Funds are available in this market for periods ranging from a single day up to a year. This market
is dominated mostly by government, banks and financial institutions.
The money market can be defined as a market for short-term money and financial assets that are
near substitutes for money. The term short-term means generally a period upto one year and near
substitutes to money is used to denote any financial asset which can be quickly converted into
money with minimum transaction cost.
Some of the important money market instruments are briefly discussed below;
1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
CAPITAL MARKET
It is market for long-term financial assets. Corporate issues these securities in the capital market
and investors can subscribe purchase or resell these in the capital market. Apart from these
securities derivatives are also traded in this market.
It is again classified into two types:
(i) Securities Market
(ii) Non Securities Market
DIFFERENCE : MONEY MARKET & CAPITAL MARKET
Basis MONEY MARKET CAPITAL MARKET
1. Subject matter Short-term financial instruments Long-term financial instruments
having maturity of less than one having maturity of more than one year.
year.
2. Participants It is wholesale market and Even a small individual investor can
Participants are large institutional deal by sale or purchase of shares,
investors, commercial banks and debentures etc.
mutual funds.
3. Subdivision No sub division is there. Divided into two common segments
primary and secondary.
4.Volume Total volume is many fold as Volume is less as compared to Money
compared of Capital markets market.
5. Instruments Treasury bill, Commercial paper, Shares, Debentures, Public Sector
cash deposit, call money Bonds and Units of Mutual Funds.
commercial bills.

Prepared by – SUDHIR SINGHAI 2


NON SECURITIES MARKET
It deals with Mutual Funds, Fixed Deposits, Bank Deposits, Provident Fund, Small Savings,
Insurance etc.
SECURITIES MARKET
Securities market however refers to the markets for those financial instruments / claims /
obligations that are commonly and readily transferable by sale.
It is divided into two interdependent and inseparable segments, the new issues (primary) market
and the stock (secondary) market.
PRIMARY MARKET
It provides channel for sale of new securities. It is the channel through which industry raise funds
by issuing different types of securities to meet their financial requirements for modernization,
expansion and diversification programmes. The Primary market discharges the important function
of transfer of savings from surplus sector to government and corporate sector.
SECONDARY MARKET
It refers to the network for the subsequent sale and purchase of securities. In other words
secondary market deals in securities previously issued. They are represented by Stock Exchanges
in any capital market.
Secondary Market has further two components –
SPOT MARKET
Here securities are traded for immediate delivery and payment.
The spot market or cash market is a market where securities are sold for cash and delivered
immediately. Contracts bought and sold on these markets are immediately effective.

FORWARD MARKET
Here securities are traded for future delivery and payment.
Forward contracts are personalized between parties and therefore not frequently traded on
exchanges. The forward market is a general term used to refer to the informal market in which
these contracts are entered and exited.
Forward contracts are personalized between parties and therefore not frequently traded on
exchanges. The forward market is a general term used to refer to the informal market in which
these contracts are entered and exited.
Forward Market has further two components –
FUTURE
Standardized forward contracts are called futures contracts and traded on a futures exchange.
A future contract, or simply called futures, is a contract to buy or sell a stated quantity of a
commodity or a financial claim at a specified price at a future specified date.
Futures are traded on the exchanges and the terms of the futures contracts are standardized by the
exchange with reference to quantity, date ,units of price quotation, minimum change in price etc.

DIFFERENCE : FUTURES & FORWARDS


BASIS FORWARDS FUTURES
1. Type of Contract They are customized market. They are standardized contract.
2. Relationship All forwards are not futures. All futures are forwards.
3. Trading through Not traded through Stock Traded through Stock Exchange.
stock exchange Exchange.
4. Centralised Lack of Centralisation of trading. It is Centralised market.
trading It is decentralized market.
5. Default There is chance of default by There are no chances of default by
party. counter party.

Prepared by – SUDHIR SINGHAI 3


OPTION
Options are contracts which provide the holder the right to sell or buy a specified quantity of an
underlying asset at a fixed price on or before the expiration of the option date.
In option contracts, the writer of the options grants the buyer of the options a right but not the
obligation, to buy or sell to the writer, some asset at the specified price on the specified date. The
writer gets a price for granting this option. The person who acquires the right is known as option
holder or option buyer and the person who grants this right is known as option seller or option
writer. The price payable for this right is known as premium and depends upon the underlying
assets or securities.
Options can be classified into two types –
CALL OPTIONS –
It provides to the holder a right to buy specified assets at specified price on or before a specified
date.
PUT OPTIONS –
It provides to the holder a right to sell specified assets at specified price on or before a specified
date.
Example – Amit enters into a contract with Sumit whereby Amit has the right to buy 100 shares
of RPL @ Rs.90 each on or before a specified date. This is a call option. In the same case if Amit
has the right to sell instead of buying, it is called put option. It is not necessary to
Amit to buy or sell the shares, it is only option available to him. If he does not exercises his right
on or before specified date option will lapse. In order to acquire this right Amit has to pay a price
to Sumit called premium.
DIFFERENCE : FUTURES & OPTIONS
FUTURES OPTIONS
1. Futures involves obligation. It must be 1. Options involves right. Options holder has
fulfilled by both parties. right to exercise his option or not.
2. There is no premium payable to buy 2. Premium is payable by the optionholder.
futures.
3. Profit or Loss of both parties depend upon 3. Profit of option writer is limited to the
the specified price and actual price on premium received but he is exposed to
settlement day. So both the parties are unlimited risk, and the loss of option holder
exposed to unlimited profit or loss. is limited to the premium paid but his gains
are unlimited.
FOREX MARKET
The Forex market deals with the multicurrency requirements, which are met by the exchange of
currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in
this market. This is one of the most developed and integrated market across the globe.
CREDIT MARKET
Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans
to corporate and individuals.
DEBT MARKET
For a developing economy like India, debt markets are a crucial source of funds. The debt market
in India is amongst the largest in Asia. It includes government securities – the largest component -
and bonds issued by public sector undertakings, other government bodies, financial institutions,
banks and companies. Debt markets are now considered an alternative route to banking channels
for finance.

Prepared by – SUDHIR SINGHAI 4


CROSS WORD

ACROSS
2. ________ Market is where subsequent sale and purchase of securities takes place.(9)
4. ________ Market can be defined as a market for short-term money and financial assets that are
near substitutes for money. (5)
6. contracts are personalized between parties and therefore not frequently traded on exchanges. (7)
9. Contracts bought and sold on these markets are immediately effective. (4)
12. NCDEX _________ is an example of ____________ Market. (11)
13. ________ Market provides channel for sale of new securities.(7)
15. Minimum seven members are required to form such company. (6)
16. __________ option provides to the holder a right to buy specified assets at specified price on
or before a specified date. (4)
17. __________ value is derived from one or more basic variable, called bases. (11)
DOWN
1. First Stock Exchange of India (19)
3. ________ are traded on Stock Exchange. (10)
5. ________ Companies are not registered in India but doing business in India. (6)

Prepared by – SUDHIR SINGHAI 5


7. _______ Markets includes government securities – the largest component - and bonds issued
by public sector undertakings, other government bodies, financial institutions, banks and
companies. (4)
8. _______ is the third largest Stock Exchange of World (3)
10. _________ are contracts which provide the holder the right to sell or buy a specified quantity
of an underlying asset at a fixed price on or before the expiration of the option date. (7)
11. Standardized forward contracts are called __________ contracts. (7)
14. _______ options provides to the holder a right to sell specified assets at specified price on or
before a specified date. (3)

Write the correct word and explain it in one or two sentences.


(a) ITOPSON
(b) STOP EAKMTR
(c) ITIDRSEAVVE
(d) SEN
(e) CLLA
(f) ERGFON NAYOCMP
(g) BABMYO OTCSK GENACEHX
(h) RAMIPYR AKRTEM
(i) OADERCSNY KRMATE
(j) LCPUBI PYCMAON
(k) EEICTRSUIS RATEKM
(l) AIEPRTV MONCYAP
(m) TFSUUER
(n) TPU
(o) WFRAORD KEATMR
(p) NOYEM KTMERA
(q) IOITMOEMCSD MKRTAE
(r) BEDT AKMERT

QUESTIONS
1. Diagrammatically explain Indian Financial System.
2. What are the reforms made in financial markets in 1991 to improve the functioning?
3. How Stock market begin in India.
4. Write a short note on Style of operating in Stock Exchanges.
5. Explain the products and participants of Derivative Markets.
6. Name any five instruments of Debt market.
7. What are the functions of Derivative market.
8. Differentiate Commodity and Derivative market.
9. Differentiate Private and Public Company.
10. What are the steps in formation of a Public company and Private company.

Prepared by – SUDHIR SINGHAI 6