Financial

Markets and
Instruments
 What to study?
5. Capital Market and
1. Meaning and Instruments
Definition
2. Role and 6. SEBI guidelines
Functions of for Listing of Shares
Financial Markets and
3. Constituents Issue of Commercial
of Financial Papers.
Markets

4. Money Market
Instruments
A financial market is a transmission mechanism between investors-lenders and
borrowers-users through which transfer of funds is facilitated.

It consists of individual investors, financial institutions and credit instruments like bills
of exchange, promissory notes, treasury bills, shares, debentures, bonds, etc.

The financial markets in essence are the credit markets that cater to the various credit
needs of individuals, firms and institutions on the one hand, and help in mobilisation of
savings in the economy on the other.

Thus, the financial markets perform economic as well as financial functions. Their
principal economic function is in the form of transfer of real econiomic resources from
those who save a part of their earnings to those who desire to have command over
real resources for investment, and their financial function lies in facilitating the transfer
of funds to those who need them to implement their plans
 Financial market refers to a market for
the creation and exchange of financial
assets (such as shares and
debentures).

 In this market, money from those who Concept of

have surplus money is transferred to
those who require investment. Financial Market
 Investors are surplus units and
business enterprises are deficit units,
where the financial market acts as a
link between surplus and deficit units
1. Providing facilities for interaction
between investors and borrowers.

2. Providing pricing information resulting Functions of

from the interaction between buyers and
sellers in the markets when they trade the
financial assets.
Financial
3. Providing security or dealings in financial
assets.
Markets
4. Ensuring liquidity by providing a
mechanism for an investor to sell the
financial assets; and

5. Ensuring law cost of transactions and

ready availability of necessary
information
Types of Financial Market

01 Money Market

02 Capital Market
 Money Market
1. Money market refers to the whole network of financial institutions dealing in short-term funds which provide an outlet to lenders and a
source of supply for such funds to borrowers.

2. It may be noted that it does not deal in cash or money as such, but handles the near money assets (short-term credit instruments) such as
the bills of exchange, promissory notes, commercial paper, treasury bills, etc. with the help of which funds are borrowed for a short
period by the business units etc.

3. The Reserve Bank of India describes money market as "the centre for dealings, mainly of short-term character, in monetary assets. It
meets the short-term requirements of borrowers and provides liquidity or cash to them by the lenders. It is the place where short-term
surplus invest funds at the disposal of the financial and other institutions and individuals are bid by borrowers, again comprising
institutions and individuals, and also the government".

4. The demand for short-term funds comes primarily from the government, business units and individual borrowers

5. The supply of loanable funds comes mostly from the central bank of the country, the commercial banks and other financial institutions.
The central bank is the primary source of credit to commercial banks while the commercial banks constitute the most important source
of short-term credit for business houses and individual borrowers.
 Capital Market
1. Capital market refers to an organisation and the mechanism through which the companies, other institutions and the government raise
long term funds by issue of securities such as shares, debentures, bonds, etc.

2. It signifies the institutional arrangement for raising long-term funds and providing facilities for marketing and trading of securities. It
symbolizes a system through which the public takes up long term securities directly or through intermediaries, and thus, helps in
mobilising savings of the community and make them available to business units and others for long-term use.

3. The demand for long-term funds is made in most countries by individuals, business corporations, public corporations, the central bank,
and the state and local governments. On the supply side of the market for such funds, there are four categories of lenders in any capital
market, viz., individual investors, institutional investors, banks and special industrial financing institutions known as development banks

4. It may be noted that the capital market consists of primary and secondary markets. The primary market deals with new fresh issue of
securities and is, therefore, known as new issue market. The secondary market, on the other hand, provides a place for purchase and sale
of existing securities and is often termed as stock market or stock , exchange.
75%
 Money Market- Instruments

01 Treasury Bill

Commercial Paper 02
03 Call Money

Certificate of
Deposit 04
05 Commercial Bill
 It is a short-term borrowing instrument of the
Government of India.

 It is a promissory note having a maturity period of


less than one year.

It is issued by the Reserve Bank of India on behalf

Treasury Bill
of the central government and is a highly liquid
instrument.

 It is available for a minimum of Rs 25,000 and in

multiples thereof.

 This instrument is also known as Zero-Coupon

Bond and has very low risk and offers an assured
return.

 The maturity period of treasury bills varies from 14

days to 364 days.
 It is a short-term unsecured money market
instrument introduced in India in 1990.

Commercial
 Basically, it is a promissory note which is
negotiable and transferable.

 It has a maturity period ranging from a minimum


of 15 days to a maximum of one year.

These are primarily used by large and creditworthy

Paper
companies for bridge financing, i.e. used as an
alternative to borrowing from banks and the capital
market.

 Companies pay an interest rate lower than the

market rates. Commercial papers are used for
purposes such as to meet the flotation cost on
long-term borrowings from the capital market.
 It is a money market instrument which is used by
commercial banks for interbank transactions.

 These instruments are used by commercial banks

for meeting their cash reserve requirements,
i.e. commercial banks borrow from each other to
fulfil any shortage of funds required to maintain the
cash reserve ratio through call money. Call Money
 It has a maturity period of less than fifteen days.

 Interest is paid on the call money, which is called

the call rate. This rate is highly variable, varying
from day to day.

 An inverse relationship exists between the call

rate and money market instruments such as
commercial papers and certificates of deposit.

 When the call money rate rises, other instruments

of the money market become comparatively
cheaper and thereby their demand increases.
 These are negotiable, unsecured instruments

Certificate of
presented in the bearer form.

 These instruments are issued by commercial banks

and financial institutions to individuals, corporations


and companies.

It is used during periods of tight liquidity by

Deposit
commercial banks to meet the demand for credit.

 Maturity period of these instruments range from 91

days to 1 year.

 Banks are not allowed to discount these

instruments.
 A commercial bill is a bill of exchange used to
finance the working capital requirements of
business firms.

 It is a short-term, negotiable, self-liquidating

instrument which is used to finance the credit
sales of firms. Commercial
Bill
 When goods are sold on credit, the buyer becomes
liable to make payment on a specific date in future.
The seller could wait till the specified date or make
use of a bill of exchange.

 The seller (drawer) of the goods draws the bill and

the buyer (drawee) accepts it.

 On being accepted, the bill becomes a marketable

instrument and is called a trade bill. These bills
can be discounted with a bank if the seller needs
funds before the bill matures.

 When a trade bill is accepted by a commercial

bank it is known as a commercial bill.
Capital Market
 Capital Market

● It refers to the market or medium through which long-term funds, both debt and equity, are raised and
invested. It comprises channels through which the savings of the community are made available for the
business sector and the public in general.

● The capital market consists of development banks, commercial banks and stock exchanges.

● Instruments used in the capital market are shares, debentures, bonds, mutual funds and public deposits.

18
Features of Capital
Market
20
 Offer through
prospectus

Capital Market Primary Market (New Offer for sale

Issue Market)

Private Placement

Secondary Market
(Stock Market/Stock Rights Issue
Exchange)

E-IPOs
Primary Market- Instruments
• Most popular method of raising funds by public
companies in the primary market.

• Subscriptions from the public are invited

through the issue of a prospectus.

• A direct deal is made to investors in order to

raise capital through the prospectus. This is
done by means of an advertisement in a
newspaper or magazine. Offer through
• The issues are underwritten, and listing is
required on at least one stock exchange. prospectus
• The prospectus should be made strictly
according to the provisions of the Companies
Act, Investor Protection Act and SEBI.
• Securities are offered through
intermediaries.

• Intermediaries can be issuing houses

and stock brokers.

• A company sells securities to brokers at

an agreed price, who then resells them
to the public willing to invest.
Offer for Sale
• A company need not go through the
formalities of issuing securities directly
to the public
• Private placement is the allotment of
securities by a company to institutional
investors and some selected individuals.

• It helps to raise capital more quickly than a

public issue.
Private
• Access to the primary market can be
expensive on account of various mandatory
and non-mandatory expenses. Placement
• Some companies, therefore, cannot afford a
public issue and choose to use private
placement
• Privilege to existing shareholders to
subscribe to new shares according to the
terms and conditions of the company

• Existing shareholders are offered a right to

Rights Issue
buy new shares in proportion to the number
of shares they already possess.
• Issue of capital to the general public through an
online system of the stock exchange.

• A company needs to enter into an agreement

with the stock exchange. This is called an Initial
Public Offering (IPO).

• Brokers registered with SEBI are appointed for

accepting applications and placing orders with
the company.

• Appointment of the registrar by the issuer

e- IPOs
company for building electronic connectivity
with the exchange.

• Issuer company may get its securities listed on

any stock exchange except for the one from
where it offered its securities
Secondary Market
 A stock exchange is an institution which provides a platform for buying and
selling of existing securities. As a market, the stock exchange facilitates the
exchange of a security (share, debenture etc.) into money and vice versa. Stock
exchanges help companies raise finance, provide liquidity and safety of
investment to the investors and enhance the credit worthiness of individual
companies
● The secondary market (also known as the stock exchange or stock market) deals in existing or second-hand
securities.

● A stock exchange is a platform for buying and selling securities.

● As a first step towards generating interest of investors in corporate securities, the Government of India
introduced the Companies Act in 1850.

● The first stock exchange was established in 1875 as ‘The Native Share and Stock Brokers Association’ in
Bombay. It was later renamed Bombay Stock Exchange (BSE).

● Subsequently, over the years, stock exchanges were also developed in Ahmedabad, Calcutta and Madras.

● Till the 1990s, the Indian secondary market comprised only regional stock exchanges.

● After the economic reforms of 1991, the Indian Stock Market acquired a three-tier system comprising
Regional Stock Exchanges, the National Stock Exchange and Over The Counter Exchange of India
(OTCEI).
1. Providing Liquidity and Marketability to
Existing Securities:

 The basic function of a stock exchange is the

creation of a continuous market where
securities are bought and sold. Functions of Stock
 It gives investors the chance to disinvest and Exchange
reinvest.

 This provides both liquidity and easy

marketability to already existing securities in
the market.
2. Pricing of Securities:

 Share prices on a stock exchange are

determined by the forces of demand and
supply.
Functions of Stock
 A stock exchange is a mechanism of constant
valuation through which the prices of Exchange
securities are determined.

 Such a valuation provides important instant

information to both buyers and sellers in the
market.
3. Safety of Transaction:

 The membership of a stock exchange is well-

regulated and its dealings are well defined
Functions of Stock
according to the existing legal framework.
Exchange
 This ensures that the investing public gets a
safe and fair deal on the market.
4. Contributes to Economic Growth:

 A stock exchange is a market in which existing

securities are resold or traded.
Functions of Stock
 Through this process of disinvestment and
reinvestment savings get channelised into their Exchange
most productive investment avenues.

 This leads to capital formation and economic

growth
4. Providing Scope for Speculation:

 The stock exchange provides sufficient scope

within the provisions of law for speculative
activity in a restricted and controlled manner.
Functions of Stock
 It is generally accepted that a certain degree of
Exchange
healthy speculation is necessary to ensure
liquidity and price continuity in the stock
market.