FINANCIAL MARKET

Financial Market: Definition

A financial market is a market for the creation (new issue of securities) and
exchange (sale of existing securities) of financial assets.

Financial Markets: Purpose

Financial market serves as an intermediary between the surplus sector
(households which have savings) and deficit sector (business firms which
needs funds).

Functions of Financial Market

 It performs the allocative function

by mobilisation of savings and channelising them into the most
productive avenues.
 It helps to determine the price for the financial asset in a particular
financial market through the market forces of demand and supply.

 It provides liquidity to the financial assets by providing ready markets

wherein the securities can be easily converted into cash or vice versa.
 It provides a common platform for exchange of securities thereby
reducing the cost of transactions by saving time, effort and money
spent by the buyers and sellers in locating each other.

Financial Intermediation: Definition

Financial intermediation refers to the process through which allocation of
funds is done by the savers in the household sectors through two main
mechanisms; banks and financial markets.
Types / Segments of Financial Market

 Capital Market
 Money Market

CAPITAL MARKET
Capital Market: Definition
Capital Market refers to facilities and institutional arrangements through which
long term funds, both debt and equity, are raised and invested.
Capital market is a segment of financial market.

Features of Capital Market

 It is a market for long term funds.

  The main participants in capital market are banks, financial institutions,
corporate bodies, foreign investors and retail investors.
 Since the cost of securities may be low, investment can be made in the
capital market with less capital.
 The securities in capital market enjoy good liquidity.
 The instruments in capital market carry high risk as the expected return
on them is high.

Main Instruments in Capital Market

 Equity Shares
 Preference Shares
 Debentures
 Bonds

Types / Segments of Capital Market

 Primary Market
 Secondary Market

Constituents of the Capital Market

 Development Banks
 Commercial Banks
 Stock Exchanges

PRIMARY MARKET
Primary Market: Definition
Primary market is also known as new issue market as the securities are issued
for the first time by the companies through this market.
Primary Market is a segment of capital market.

Features of Primary Market

 It is the new issue market.

 Only buying of securities takes place.
 Prices of the securities are determined by the company.
 It involves dealings between the company and investors.
 There is no fixed location of primary market.

Instruments of Primary Market

  Shares
 Debentures
 Bonds

Methods of Floatation in Primary Market

 Offer through Prospectus (The company approaches the members of

the general public directly by issuing a prospectus)
 Offer For Sale (The company approaches members of the general
public indirectly through intermediaries like issuing houses, stock
brokers etc.)
 Private Placement (The company can raise finance by allotting
securities to selective individuals and institutions only)
 e-IPOs (The investors may subscribe to the securities of a company
online)
 Rights Issue (It is a pre-emptive right given only to the existing
shareholders to subscribe to the securities of the company as per its
terms and conditions)

SECONDARY MARKET
Secondary Market: Definition
It is a market for old or existing securities
It is a segment of capital market.

Features of Secondary Market / Stock Exchanges

 It is the market for old/existing securities.

 Both buying and selling of securities takes place.
 Prices of the securities are determined by the forces of demand and
supply.
 It involves dealings between two investors.
 Stock exchanges exist at fixed location.

MONEY MARKET
The money market is a market for short term debt instruments whose period
of maturity is upto one year.
It is a segment of financial market.

Features of Money Market

 It is a market for short term funds.

 The main participants are institutional investors.
 Since the cost of securities may be high, investment in the money
market may require huge capital outlay.

 The money market enjoys high liquidity as The Discount Finance House
of India works as a compulsory market maker for it.
 The instruments in money market carry low risk as the expected return is
low on
 INSTRUMENTS IN MONEY MARKET
 Call money is a short term money market instrument
through which one bank may borrow money from
another bank to maintain its cash reserve ratio as per
the guidelines of RBI.
 Call Money
 It’s maturity period may range from a single day to a
fortnight.
 The rate at which the interest is paid on call money is
called call rate.

 Certificate of deposit is a short term money market

instrument issued by commercial banks and
development financial institutions.
 It is an unsecured and negotiable instrument in
Certificate of
bearer form.
Deposit
 It may be issued to individuals, corporations and
companies when banks need cash to meet credit
needs

Treasury Bills  Treasury bills are short term money market

instrument which are issued by Reserve bank of India
on behalf of the Government of India.
 They are issued in the form of promissory notes and
are very safe instruments.
 They are sold at discount and redeemed at par.
 They are also known as zero-coupon-discount bonds.
  The minimum value of their purchase is ? 25,000 and
in multiples thereof.

 Commercial bill is a short term money market

instrument.
 A business firm may draw a bill of exchange in favour
of another in lieu of credit purchases.
 On acceptance by the drawee (buyer) it becomes a
Commercial
trade bill.
Bill
 When the trade bill is accepted by a commercial-
bank for discounting it is called commercial bill.
 A bill of exchange is a freely negotiable instrument.
 It is usually drawn for a period of 3 months.

 Commercial Papers are the short term money market

instrument issued by large and credit worthy
companies.
 Commercial  The instrument is in the form of an unsecured
Paper promissory note and is freely transferable by
endorsement.
 Its maturity period may range from a fortnight to a
year.