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Flow of Funds

Provides the ability to transfer income through time Borrowing sacrifices future income to increase current income. Saving, or investing, sacrifices current income in exchange for greater expected income in the future.

Flow of Funds
1. Direct Transfer
business sells its stock directly to investors

Flow of Funds
2. Indirect Transfer through Investment Bankers
investment banker acts as middleman and facilitates issuance of securities by reselling the securities to savers

Flow of Funds
3. Indirect Transfer through financial intermediary
bank or mutual fund obtains funds from savers and uses the money to lend or purchase securities

Types of Financial Markets

Money Markets Capital Markets

Money market
Money market is a mechanism that deals with the lending of short term funds (less the a year) A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded

Characteristics of developed money market

Existence of central bank High organized commercial banking system Integrated structure of money market Availability of proper credit instruments Adequacy and elasticity of bonds International attraction Uniformity of interest rates

Instruments of money market

Treasury bills Commercial papers Money at call Promissory notes Bills of exchange

Types o capital market

Primary market

Secondary market

Primary market
Primary market is that market in which shares debentures and other securities are sold for the first time for collecting long term capital The market is concerned with new issues therefore the primary market is also called NEW ISSUE MARKET


It is related with new shares It has no particular place Following are methods of raising capital in the primary market I. Public issue II. Offer for sale III. Private placement IV. Right issue

The secondary market is that market in which the buying and selling of the previously issued securities is done The transactions of the secondary market are generally done through the medium of stock exchange The chief purpose of the secondary market is to create liquidity in securities

Features of secondary market

It creates liquidity It comes after primary market It has a particular place

It encourage new investments

Equity Markets
corporations raise funds by issuing new securities

securities are traded among investors after they have been issued

Debt market

Debt market instruments

Derivatives Markets
Options, futures and swaps are securities whose value is determined, or derived directly from other assets These can be used to manage risk or to speculate

Option market
A option gives right its owner the right to buy or sell an underlying assets on or before a given date at a predetermined price There are two type of options Call option Put option

Call option

Put option
Put option gives the option holder right to sell a fixed numbers of shares of a certain stock at a given exercise price on or before the expiration date

Future market
Futures contract is an agreement between two parties to exchange an asset for cash at a predetermined future date for a price that is specified today Financial futures contracts may be various types such as Interest rate futures Treasury bills futures Euro dollar futures Treasury bond futures Stock index futures Currency futures

Government security market

Corporate debt market