Financial market

Money Market.
Money market is a market for short term financial assets  Short term instruments can be converted in to cash readily without any loss and low transaction cost .

Definition
Crowther , “ the money market is the collective name given to the various firms and institutions that deal in the various grades of near money.”

Capital market 1.Money market Vs. It is a market for short term funds for a period not exceeding one year. capital market is a market for long term funds exceeding a period of one year .

Generally transactions take place through oral communication.Features of a money market    It deals with financial assets having a maturity period up to one year only. It deals with those assets which can be converted in to cash readily without loss and with minimum transaction cost. Relevant documents and written communication can be exchanged subsequently .

 .  Commercial banks play an dominant role in this market.Transactions have to be conducted without the help of brokers  It is not a single homogeneous market. It comprises of several sub-markets.

Structure of Indian money market Organised sector Cooperative Sector. Unorganis ed sector .

Recent Development  Integration of Unorganised sector with the Organised sector  Widening of call money market  Introduction of innovative instruments  Offering of market rates of interest  Promotion of bill culture .

 Entry of money market mutual funds  Setting up of credit rating agencies  Adoption of suitable monetary policy  Establishment of DFHI  Setting up of securities trading corporation of India ltd. .

 Development of capital market  Smooth functioning of commercial banks  Effective central bank control  Formulation of suitable monetary policy  Non-inflationary source of finance to govt.  .Importance of money market Development of trade and industry.

Players in money market Govt  Central bank  Banks  Discount and acceptance house  Financial institutions  Corporate house  Mutual funds  Dealers  .

Role of the players Player Govt Central bank Banks Discount house Acceptance house Financial institution Mutual funds Corporate houses Dealers Roles Issuer / borrower Intermediary Issuer Market makers Market makers Issuers / borrowers Investors / lenders Issuers Intermediaries .

IV. II. Call money market Commercial bill market and discount market Acceptance market Treasury bill market . III.Composition of money market I.

Call money market The call money market refers to the market for extremely short period loans ie.  These loans are repayable on demand at the option of either the lender or the borrower.  . one day to fourteen days.

 .Operations in call market Borrowers and lenders in a call market contact each other over telephone.  After negotiations over the phone. borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest.  The lender issues cheque in favour of the borrower  The borrower in turn issues call money borrowing receipt.

Advantages o o o o o High liquidity High profitability Maintenance of SLR Safe and cheap Assistance to central bank operations .

Drawbacks o o o Uneven development Lack of integration Volatility in call money rates .

. the seller draws a bill on the buyer for the amount due.  As soon as goods are sold on credit.Commercial bill market / Discount market A commercial bill is one which arises out of a genuine trade transactions.  The buyer accept it immediately agreeing to pay the amount mentioned therein after a certain specified date.

1881. or to the order of a certain person or to the bearer of the instrument” . directing a certain person to pay a certain sum of money only to. signed by the maker. defines a bill of exchange as “an instrument in writing containing an unconditional order.Definition: Section 5 of the Negotiable Instrument Act.

Types of bill Demand and usance bills  Clean bill and documentary bills  Inland and foreign bills  Export bills and import bills  Indigenous bills  Accommodation bills and supply bills  .

Discount market Discount market refers to the market where short term genuine trade bills are discounted by financial intermediaries like commercial banks. .

there are specialist firms called acceptance houses which accept bills drawn by traders and impart greater marketability to such bills.  The acceptance market refers to the market where short term genuine trade bills are accepted by financial intermediaries. .Acceptance market  In London.

4. 5. 3.Advantages / Importance 1. 6. 7. Liquidity Self-liquidating and negotiable asset Certainty of payment Ideal investment Simple legal remedy High and quick yield Easy central bank control . 2.

Disadvantages Stamp duty  Attitude of banks  Absence of acceptance services  Difficulty in ascertaining genuine trade bills  .

Treasury bill market o o o Treasury bills represent short term borrowings of the govt. The govt promises to pay the specified amount mentioned therein to the bearer of the instrument on the due date. . A treasury bill is nothing but a promissory note issued under by the govt under discount for a specified period stated therein.

Importance Safety  Liquidity  Ideal short term investment  Ideal fund management  Statutory liquidity requirement  Non-inflationary monetary tool  Hedging facility  .

Defects Absence of competitive bids  Absence of active trading  .

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Capital Market Primary market Secondary market .

In other words. . This offer may be for the first time ie. new issue market deals with raising fresh capital by companies either for cash or for consideration other than cash.Primary market o o Primary market is a place where securities are introduced as an offer to the public. new issue.

3.Functions of New issue market 1. 2. Origination Underwriting Distribution .

analysis and processing of new project proposals.Origination Origination refers to the work of investigation. .

 Advisory services which improve the quality of capital issues and ensure its success .Two aspects: A careful study of the technical. economic and financial viability to ensure soundness of the project.

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