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FINANCIAL MARKETS
CHAPTER AT A GLANCE
A. Financial Market: Concept, Functions and Types
1. Concept: Financial markets are a crucial link in the savings-investment process. They serve to transfer
financial resources from savers to the entrepreneurial borrowers. The financial markets serve as an
intermediary between them. They create relation between the surplus units and deficit units. In other
words, financial markets bring together borrowers and lenders, making available funds to those willing
to pay for their use.
A financial market is a market for the creation and exchange of financial assets. Creation of financial
assets indicates the initial issue of financial securities, like shares and debentures by a company.
Exchange of financial assets indicates purchase and sale of existing financial assets. It helps to link the
savers and the investors by mobilising funds between them. For linking them, financial market performs
a function which is known as allocative function.
2. Functions of Financial Market
- Mobilises funds
- Facilitates price discovery
- Provides liquidity to financial assets
- Reduces the cost of transaction
3. Types: Financial markets are mainly of two types-
- Money market, and - Capital market
B. Money Market: Concept and Instruments
1. Concept: The money market is a market in which short-term funds having tenure of less than one year
are borrowed and lent.
2. Instruments: Some of the important money market instruments are:
- Treasury Bill: Instrument of short-term borrowing issued by the RBI on behalf of Indian Government.
- Commercial Bill: Short-term instrument used to finance working capital requirements of the business.
- Commercial Paper (CP): Unsecured instrument issued in the form of promissory note.
- Certificate of Deposit (CD): Bearer document issued by commercial banks and development financial
institutions against deposits kept by companies, individuals and institutions with them.
- Call Money: Short-term finance generally used by banks to maintain cash reserve ratio.
3. Participants: Main participants of money market are:
- Reserve Bank of India - Commercial Banks
- Non-banking Finance Companies - State Government
- Large Corporate Houses - Mutual Funds