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CHAPTER 1 INTRODUCTION TO FINANCIAL MARKET

A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods. There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.

In Finance, Financial Markets Facilitate: o The raising of capital (in the capital markets) o The transfer of risk (in the derivatives markets) o Price discovery o Global transactions with integration of financial markets o The transfer of liquidity (in the money markets) o International trade (in the currency markets)

And are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. This return on investment is a necessary part of markets to ensure that funds are supplied to them.

Definition:

In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE, BSE, and NSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international.

Basic Roles Of The Financial Market:

In a very simple economy, there are two sets of economic agents: households and firms. Households save and the firms invest. It is the role of the financial sector to ensure that the savings of the household sector reaches the firms, which need the resources for investment. In reality the economy is of course much more complex than this overly simplified system. In a real economy, savers include not only households but also firms and government. Similarly, investments can be made by not only firms, but also households and the government. However, even in a more complex economy, the main function of the financial system essentially involves the mobilization of resources from those who have surplus and allocation of these resources to those who face deficit. In other words, the financial sector plays the role of an intermediary by ensuring smooth flow of resources from those who have surplus funds to those who have a shortage of funds. The second important role of the financial system is that of risk management. Every business enterprise involves risk. The financial institutions provide a framework for evaluating these risks. The financial market allows sharing, trading and transferring of risk among different economic agents. The third role of the financial markets is to pool and communicate information efficiently, so that market prices reflect available information.

One of the important requisite for the accelerated development of an economy is the existence of a dynamic financial market. A financial market helps the economy in the following manner. o Saving Mobilization: Obtaining funds from the savers or surplus units such as household individuals, business firms, public sector units, central government, state governments etc. is an important role played by financial markets. o Investment: Financial markets play a crucial role in arranging to invest funds thus collected in those units which are in need of the same. o National Growth: An important role played by financial market is that, they contributed to a nations growth by ensuring unfettered flow of surplus funds to deficit units. Flow of funds for productive purposed is also made possible. o Entrepreneurship Growth: Financial market contributes to the development of the entrepreneurial claw by making available the necessary financial resources. o Industrial Development: The different components of financial markets help an accelerated growth of industrial and economic development of a country, thus contributing to raising the standard of living and the society of well-being.

CHAPTER 2 TYPES OF FINANCIAL MARKET

FINANCIAL MARKET

CAPITAL MARKET

MONEY MARKET

PRIMARY MARKET

SECONDARY MARKET

A. CAPITAL MARKET:

Capital markets provide for the buying and selling of long term debt or equity backed securities. When they work well, the capital markets channel the wealth of savers to those who can put it to long term productive use, such as companies or governments making long term investments. Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. It Consists Of: i. ii. Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof.

The Capital Market Is Subdivided Into: a) Primary Market b) Secondary Market

Primary Market:

The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate [disambiguation needed] of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market.

Features Of Primary Markets Are: o This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). o In a primary issue, the securities are issued by the company directly to investors. o The company receives the money and issues new security certificates to the investors. o Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. o The primary market performs the crucial function of facilitating capital formation in the economy. o The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." o The financial assets sold can only be redeemed by the original holder.

Methods Of Issuing Securities In The Primary Market Are: o Public issuance, including initial public offering; o Rights issue (for existing companies); o Preferential issue.

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Secondary Market:

The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bank to investors such as Fannie Mae and Freddie Mac. The term "secondary market" is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production). With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market. The secondary market for a variety of assets can vary from loans to stocks, from fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange, London Stock Exchange and NASDAQ provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade over the counter, or by phoning the bond desk of ones broker-dealer. Loans sometimes trade online using a Loan Exchange.

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o Function Of Secondary Market: In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly; this is how stock exchanges originated, see History of the Stock Exchange). As a general rule, the greater the number of investors that participate in a given market place and the greater the centralization of that market place, the more liquid the market. Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the investor's desire not to tie up his or her money for a long period of time, in case the investor needs it to deal with unforeseen circumstances) with the capital user's preference to be able to use the capital for an extended period of time. Accurate share price allocates scarce capital more efficiently when new projects are financed through a new primary market offering, but accuracy may also matter in the secondary market because: 1) Price accuracy can reduce the agency costs of management, and make hostile takeover a less risky proposition and thus move capital into the hands of better managers, 2) Accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing.

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Capital Market
Primary Market New stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Secondary Market Existing securities are sold and bought among investors or traders, usually on a securities exchange, over-thecounter, or elsewhere. The existence of secondary markets increases the willingness of investors in primary markets, as they know they are likely to be able to swiftly cash out their investments if the need arises.

Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf.

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B. MONEY MARKET: As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure.

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o Functions of the money market: o Transfer of large sums of money. o Transfer from parties with surplus funds to parties with a deficit. o Allow governments to raise funds. o Help to implement monetary policy. o Determine short-term interest rates.

o Participants: The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in short-term financial instruments commonly called "paper." This contrasts with the capital market for longer-term funding, which is supplied by bonds and equity. The core of the money market consists of interbank lending--banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. These instruments are often benchmarked to (i.e. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency. Finance companies typically fund themselves by issuing large amounts of assetbacked commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities and similar financial assets.

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Certain large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines. o Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers. o Retail and institutional money market funds o Banks o Central banks o Cash management programs o Merchant Banks

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o Money Market Instruments:

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Money Market Instruments Certificate Of Deposit Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. Short-term loansnormally for less than two weeks and frequently for one dayarranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.

Repurchase Agreements

Commercial Paper

Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value. Deposits made in U.S. dollars at a bank or bank branch located outside the United States. Short-Term (In the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, the Federal Home Loan Banks and the Federal National Mortgage Association.

Eurodollar Deposit

Federal Securities

Agency

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Federal Funds

(In the U.S.). Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve; these are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.

Municipal Notes

(In the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues.

Treasury Bills

Short-term debt obligations of a national government that are issued to mature in three to twelve months.

Money Funds

Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.

Foreign Exchange Swaps

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o Difference Between Money Markets And Capital Markets: The Money markets are used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight. Whereas the Capital markets are used for the raising of long term finance, such as the purchase of shares or for loans that are not expected to be fully paid back for at least a year. Funds borrowed from the money markets are typically used for general operating expenses, to cover brief periods of illiquidity. For example a company may have inbound payments from customers that have not yet cleared, but may wish to immediately pay out cash for its payroll. When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income. It can take many months or years before the investment generate sufficient return to pay back its cost, and hence the finance is long term. Together, money markets and capital markets form the financial markets as the term is narrowly understood.

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Other Types of Financial Market

Commodity Markets

Derivatives Markets

Futures Markets

Insurance Markets

Foreign Exchange Markets

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C. COMMODITY MARKET: Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, and electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets and currency markets cover those concerns separately and in more depth. One focus of this article is the relationship between simple commodity money and the more complex instruments offered in the commodity markets.

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D. DERIVATIVES MARKET: The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

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E. FUTURES EXCHANGE:

A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. Such instruments are priced according to the movement of the underlying asset (stock, physical commodity, index, etc.). The aforementioned category is named "derivatives" because the value of these instruments is derived from another asset class.

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F. INSURANCE:

Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

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G. FOREIGN EXCHANGE MARKET:

The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. EBS and Reuters' dealing 3000 are two main interbank FX trading platforms. The foreign exchange market determines the relative values of different currencies. The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Euro zone members and pay Euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.

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In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of the following characteristics: o Its huge trading volume representing the largest asset class in the world leading to high liquidity; o Its geographical dispersion; o Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday; o The variety of factors that affect exchange rates; o The low margins of relative profit compared with other markets of fixed income; and o The use of leverage to enhance profit and loss margins and with respect to account size.

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CHAPTER 3 FUNCTIONS OF FINANCIAL MARKETS

There are two types of Financial Market Functions: a) Intermediary Functions b) Financial Functions

o Intermediary Functions: The intermediary functions of financial markets include the following: o Transfer of Resources: Financial market facilitates the transfer of real economic resources from lenders to ultimate borrowers. o Enhancing Income: Financial markets allow lenders to earn interest or dividend on their surplus invisible funds, thus contributing to the enhancement of the individual and the national income. o Productive Usage: Financial market allow for the productive use of the funds borrowed. The enhancing the income and the gross national production. o Capital Formation: Financial market provides a channel through which new savings flow to aid capital formation of a country. o Price Determination: Financial markets allow for the determination of price of the traded financial assets through the interaction of buyers and sellers. They provide a sign for the allocation of funds in the economy based on the demand and supply through the mechanism called price discovery process.
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o Sale Mechanism: Financial markers provide a mechanism for selling of a financial asset by an investor so as to offer the benefit of marketability and liquidity of such assets. o Price Determinants: Financial market allow for the determination of price of the traded financial asset through the interaction of buyers and sellers. They provide a signal for the allocation of funds in the economy, based on the demand and supply through the mechanism called price discovery process. o Sale Mechanism: Financial markets provide a mechanism for selling of a financial asset by an investor so as to offer the benefits of marketability and liquidity, of such assets.

o Information: The activities of the participants in the financial market result in the generation and the consequent dissemination of information to the various segments of the market. So as to reduce the cost of transaction of financial assets.

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o Financial Functions: o Providing the borrower with funds so as to enable them to carry out their investment plans. o Providing the lenders with earning assets so as to enable them to earn wealth by deploying the assets in production debentures. o Providing liquidity in the market so as to facilitate trading of funds.

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CHAPTER 4 CONSTITUENTS OF FINANCIAL MARKET

o Following Are The Constituents: o Primary Market: Primary market is a market for new issues or new financial claims. Hence its also called new issue market. The primary market deals with those securities which are issued to the public for the first time. o Secondary Market: Its a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities. o Money Market: Money market is a market for dealing with financial assets and securities which have a maturity period of up to one year. In other words its a market for purely short term funds. o Capital Market: A capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities which have a maturity period of above one year. Capital market may be further divided in to: (a) Industrial securities market (b) Govt. securities market and (c) Long term loans market. o Debt Market: The market where funds are borrowed and lent is known as debt market. Arrangements are made in such a way that the borrowers agree to pay the lender the original amount of the loan plus some specified amount of interest.

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o Euro Bond Market: A market where bonds are denominated in currency other than that of the country in which they are issued is called euro bond market. Euro- Bond market is international in character. A striking characteristic of euro-bond market is that bulk if these bonds are denominated in dollars. o Equity Markets: A market where ownership of securities are issued and subscribed is known as equity market. An example of a secondary equity market for shares is the Bombay stock exchange. o Financial Service Market: A market that comprises participants such as commercial banks that provide various financial services like ATM. Credit cards. Credit rating, stock broking etc. is known as financial service market. Individuals and firms use financial services markets, to purchase services that enhance the working of debt and equity markets. o Depository Markets: A depository market consist of depository institutions that accept deposit from individuals and firms and uses these funds to participate in the debt market, by giving loans or purchasing other debt instruments such as treasure bills. o Non-Depository Market: Non-depository market carries out various functions in financial markets ranging from financial intermediary to selling, insurance etc. The various constituencies in non-depositary markets are mutual funds, insurance companies, pension funds, brokerage firms etc.

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CHAPTER 5 INDIAN FINANCIAL MARKET o What is India Financial Market? What does the India Financial market comprise of? It talks about the primary market, FDIs, alternative investment options, banking and insurance and the pension sectors, asset management segment as well. With all these elements in the India Financial market, it happens to be one of the oldest across the globe and is definitely the fastest growing and best among all the financial markets of the emerging economies. The history of Indian capital markets spans back 200 years, around the end of the 18th century. It was at this time that India was under the rule of the East India Company. The capital market of India initially developed around Mumbai; with around 200 to 250 securities brokers participating in active trade during the second half of the 19th century.

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o Scope of the India Financial Market: The financial market in India at present is more advanced than many other sectors as it became organized as early as the 19th century with the securities exchanges in Mumbai, Ahmadabad and Kolkata. In the early 1960s, the number of securities exchanges in India became eight - including Mumbai, Ahmadabad and Kolkata. Apart from these three exchanges, there was the Madras, Kanpur, Delhi, Bangalore and Pune exchanges as well. Today there are 23 regional securities exchanges in India. The Indian stock markets till date have remained stagnant due to the rigid economic controls. It was only in 1991, after the liberalization process that the India securities market witnessed a flurry of IPOs serially. The market saw many new companies spanning across different industry segments and business began to flourish. The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) in the mid 1990s helped in regulating a smooth and transparent form of securities trading. The regulatory body for the Indian capital markets was the SEBI (Securities and Exchange Board of India). The capital markets in India experienced turbulence after which the SEBI came into prominence. The market loopholes had to be bridged by taking drastic measures.

o Potential of the India Financial Market: India Financial Market helps in promoting the savings of the economy helping to adopt an effective channel to transmit various financial policies. The Indian financial sector is well-developed, competitive, efficient and integrated to face all shocks. In the India financial market there are various types of financial products whose prices are determined by the numerous buyers and sellers in the market. The other determinant factor of the prices of the financial products is the market forces of demand and supply. The various other types of Indian markets help in the functioning of the wide India financial sector.

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Features of the Financial Market in India: o India Financial Indices - BSE 30 Index, various sector indexes, stock quotes, Sensex charts, bond prices, foreign exchange, Rupee & Dollar Chart o Indian Financial market news o Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty, company information, issues on market capitalization, corporate earnings statements o Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading activities, Interest Rates, Money Market, Government Securities, Public Sector Debt, External Debt Service o Foreign Investment - Foreign Debt Database composed by BIS, IMF, OECD,& World Bank, Investments in India & Abroad o Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity Indexes o Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes o National and Global Market Relations o Mutual Funds, Insurance o Loans o Forex and Bullion.

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CHAPTER 6 CONCLUSION
Financial market efficiency is an important topic in the world of Finance. While most financiers believe the markets are neither 100% efficient, nor 100% inefficient, many disagree where on the efficiency line the world's markets fall. It can be concluded that in reality a financial market cant be considered to be extremely efficient, or completely inefficient. The financial markets are a mixture of both, sometimes the market will provide fair returns on the investment for everyone, while at other times certain investors will generate above average returns on their investment.

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BIBLIOGRAPHY
Websites: o http://en.wikipedia.org/wiki/Financial_market o http://www.investopedia.com/terms/f/financial-market.asp Books: o Keith Pilbeam (2010) Finance and Financial Markets, Palgrave (ISBN 9780230233218) o Steven Valdez, An Introduction To Global Financial Markets, Macmillan Press Ltd. (ISBN 0-333-76447-1)

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