FINANCIAL MARKET

What is Financial Market :

What is Financial Market : Mechanism that allows people to buy and sell financial securities (such as stocks and bonds) and items of value at low transaction cost. Markets work by placing many interested buyers and sellers in one place, thus making easier for them to find each other.

Characteristics of Financial Markets:

Large volume of Transaction Various segments Number of Buyer Or Seller Dominated By Financial Intermediaries Negative Externalities

HOW FINANCIAL MARKET WORKS :

BORROWER- Issues a receipt to Lender promising to payback the capital.
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RECEIPTS- Securities which may be freely bought or sold. LENDER- Will expect some compensation in form of interest or dividends, in return.

Classification of Financial Markets

Unorganized Markets

Organized Markets

Money Market: Money Market Is a Financial Institutions, Which deal with short-term funds in the economy. It refers to the institutional arrangements facilitating borrowing and lending of short-term funds. In a money market fund can be borrowed for a short period varying from a day, week, a month etc. money markets involves Treasury bills, commercial paper,
bankers' acceptances, certificates of deposit, and short- Term loan and assetbacked securities.

Nature of Money Market:

Highly Organized Commercial banking system.

Number of Dealers. An Apex central bank. Proper co-ordination Among Sub-markets. Existence of large Number of sub-markets.

Instrument of Money Market :

Instrument of Money Market A variety of instrument are available in a developed money market In India till 1986, only a few instrument were available.

Commercial paper (CP) :

Commercial paper (CP) It is a short term unsecured loan issued by a corporation typically financing day to day operation It is very safe investment because the financial situation of a company can easily be predicted over a few months Only company with high credit rating issues CP.

Treasury Bills (T-Bills) :

Treasury Bills (T-Bills) (T-bills) are the most marketable money market security They are issued with three-month, six-month and one-year maturities T-bills are purchased for a price that is less than their par(face) value; when they mature, the government pays the holder the full par value T-Bills are so popular among money market instruments because of affordability to the individual investors.

Certificate of deposit (CD) :

Certificate of deposit (CD) A CD is a time deposit with a bank Like most time deposit, funds can not withdrawn before maturity without paying a penalty CDs have specific maturity date, interest rate and it can be issued in any denomination The main advantage of CD is their safety Anyone can earn more than a saving account interest.

Repurchase agreement (Repos) :

Repurchase agreement (Repos) Repo is a form of overnight borrowing and is used by those who deal in government securities They are usually very short term repurchases agreement, from overnight to 30 days of more The short term maturity and government backing usually mean that Repos provide lenders with extremely low risk Repos are safe collateral for loans.

Role/ Importance of MoneyMarket: Source of Capital. 2. Ideal Investment. 3. Economic development. 4. Helpful to Govt.
1.

Structure of Indian Money Market - Chart

The entire money market in India can be divided into two parts. They are organized money market and the unorganized money market. The unorganized money market can also be known as an unauthorized money market. Both of these components comprise several constituents. The following chart will help you in understanding the organizational structure of the Indian money mark

Components, SubMarkets of Indian Money Market

After studying above organisational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below. 1. Call Money Market : It an important sub market of the Indian money market. It is also known as money at call and money at short notice. It is also called inter bank loan market. In this market money is demanded for extremely short period. The duration of such transactions is from few hours to 14 days. It is basically located in the industrial and commercial locations such as Mumbai, Delhi, Calcutta, etc. These transactions help stock brokers and dealers to fulfill their financial requirements. The rate at which money is made available is called as a call rate. Thus rate is fixed by the market forces such as the demand for and supply of money. 2. Commercial Bill Market : It is a market for the short term, self liquidating and negotiable money market instrument. Commercial bills are used to finance the movement and storage of agriculture and industrial goods in domestic and foreign markets. The commercial bill market in India is still underdeveloped. 3. Treasury Bill Market : This is a market for sale and purchase of short term government securities. These securities are called as Treasury Bills which are promissory notes or financial bills issued by the RBI on behalf of the Government of India. There are two types of treasury bills. (i) Ordinary or Regular Treasury Bills and (ii) Ad Hoc Treasury Bills. The maturity period of these securities range from as low as 14 days to as high as 364 days. They have become very popular recently due to high level of safety involved in them. 4. Market for Certificate of Deposits (CDs) : It is again an important segment of the Indian money market. The certificate of deposits is issued by the commercial banks. They are worth the value of Rs. 25 lakh and in multiple of Rs. 25 lakh. The minimum subscription of CD should be worth Rs. 1 Crore. The maturity period of CD is as low as 3 months and as high as 1 year. These are the transferable investment instrument in a money market. The government initiated a market of CDs in order to widen the range of instruments in the money market and to provide a higher flexibility to investors for investing their short term money. 5. Market for Commercial Papers (CPs) : It is the market where the commercial papers are traded. Commercial paper (CP) is an investment instrument which can be issued by a listed company having working capital more than or equal to Rs. 5 cr. The CPs can be issued in multiples of Rs. 25 lakhs. However the minimum subscription should at least be Rs. 1 cr. The

maturity period for the CP is minimum of 3 months and maximum 6 months. This was introcuced by the government in 1990. 6. Short Term Loan Market : It is a market where the short term loan requirements of corporates are met by the Commercial banks. Banks provide short term loans to corporates in the form of cash credit or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.

Capital Market: The term capital market refers to the institutional arrangements for facilitating the borrowing and lending of long-term funds. According to P.K. Dhar, This is not a market for capital goods; rather it is a market for raising and advancing money capital for investment purposes. Nature Of Capital Market; It Deals In Long-Term Securities It Performs Trade-off Function It Market consists of organized and unorganized sector It Helps In Capital Formation It Helps In Creating Liquidity

Significance, Role or Functions of Capital Market

the important functions and role of the capital market.

1.

Mobilization of Savings : Capital market is an important source for mobilizing idle savings from

the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments.

2.

Capital Formation : Capital market helps in capital formation. Capital formation is net addition to

the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation.

3.

Speed up Economic Growth and Development : Capital market enhances production and

productivity in the national economy. As it makes funds available for long period of time, the financial

requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. .

Structure of Indian Capital Market with Diagram

Broadly speaking the capital market is classified in to two categories. They are the Primary market (New Issues Market) and the Secondary market (Old (Existing) Issues Market). This classification is done on the basis of the nature of the instrument brought in the market. However on the basis of the types of institutions involved in capital market, it can be classified into various categories such as the Government Securities market or Gilt-edged market, Industrial Securities market, Development Financial Institutions (DFIs) and Financial intermediaries. All of these components have specific features to mention. The structure of the Indian capital market has its distinct features. These different segments of the capital market help to develop the institution of capital market in many dimensions. The primary market helps to raise fresh capital in the

market. In the secondary market, the buying and selling (trading) of capital market instruments takes place. The following chart will help us in understanding the organizational structure of the Indian Capital market.

1.Government Securities Market : This is also known as the Gilt-edged market. This refers to the market for government and semi-government securities backed by the Reserve Bank of India (RBI). 2.Industrial Securities Market : This is a market for industrial securities i.e. market for shares and debentures of the existing and new corporate firms. Buying and selling of such instruments take place in this market. This market is further classified into two types such as the New Issues Market (Primary) and the Old (Existing) Issues Market (secondary). In primary market fresh capital is raised by companies by issuing new shares, bonds, units of mutual funds and debentures. However in the secondary market already existing i.e old shares and debentures are traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock exchanges. They are the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and Over The Counter Exchange of India (OTCEI). 3.Development Financial Institutions (DFIs) : This is yet another important segment of Indian capital market. This comprises various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up. 4.Financial Intermediaries : The fourth important segment of the Indian capital market is the financial intermediaries. This comprises various merchant banking institutions, mutual funds, leasing finance companies, venture capital companies and other financial institutions. These are important institutions and segments in the Indian capital market.