Outline of the

Presentation
Functions of the Financial Markets
Understand the Role of the Direct and

Indirect Finance
Types of Financial Markets
Financial Market Analysis

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4 major components of Financial System

Financial Institutions

Financial Markets

Financial Instruments

Financial Services

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Organizational Structure of Indian

Financial System
Financial System
Financial
Institutions

Financial
Markets

Financial
Instruments

Financial
Services

Primary
Regulator
y

NonIntermediari
es

Intermediarie
s

Organized

Other
s

Unorganize
d

Primary

Capital
Banking

Non Banking
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Secondar
y

Short
Term
Secondar
y

Long Term
Medium Term

Equity
Debt
Derivatives Market

Money
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Financial Institutions
Meaning: business organizations that act as

mobilisers and depositors of savings, and as

purveyors of credit or finance
Mobilise and transfer the savings or funds
from surplus unit to deficit unit
Bifurcated into Regulatory and Intermediaries
The regulators are assigned with the job of
governing all the divisions of the Indian
financial system.Eg: RBI, SEBI, CBDT, Central
Board of Excise and Customs

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Also classified as intermediaries and non-

intermediaries

(All banking institutions are

intermediaries)

Non banking institutions which act as

intermediary- UTI, LIC and GIC (called NBFI)

Non intermediary institutions: IDBI, IFC and
NABARD came into existence because of
governmental efforts (called as NBSFO)

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Financial Market
A financial market is a mechanism that

allows people to easily buy and sell

(trade) financial securities (such as stocks
and
bonds),
commodities
(such
as
precious metals or agricultural goods),
and other fungible items of value at low
transaction costs and at prices that
reflect the efficient-market hypothesis.

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Cont
Financial

Markets
and
Financial
intermediaries have the basic functions
of getting people with surplus funds to
those who have a shortage of funds.

Well functioning of the financial markets

and financial intermediaries are crucial

to economic health.

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Function of the Financial Markets

Funds

Financial
Intermediaries

Funds

Funds
Lender-Savers
Households
Business firms
Governments
Foreigners

Funds
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Financial
Markets

Borrower Spenders
Funds Business Firms
Governments
Households
Foreigners

Overview of Financial
Markets
Financial Market: a market in which financial
assets (securities) such as stocks and bonds
can be purchased or sold
Financial markets provide for financial

intermediation--financial savings (Surplus Units)

to investment (Deficit Units)
Financial markets provide payments system
Financial markets provide means to manage risk

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Financial System & Economic

Development
Economic
Development
Saving & Investment or
Capital Formation
Surplus Spending
Economic Units

Deficit Spending Economic

Units

Income minus
(Consumption + Own
Investment)

Income minus
(Consumption + Own
Investment

Surplus or Saving

Deficit or Negative Saving

Financial System
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Functions of the Financial Markets

Person A is having a powerful idea and Person B is

having surplus funds.

The Role or function of the financial markets (bonds
and Stock markets) is get people like A and B together.
This requires flow of funds from savers to borrowers.
This flow can occur in two ways; Direct Finance and
Indirect finance route.

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Direct and Indirect Finance

Direct Finance: Borrowers borrow funds directly from

the lenders in the financial markets by selling them

securities (financial instruments), which are claims on
the borrowers future income or assets.
Securities are assets for the person who buys them but
liabilities to the person or firms that sells or issue them.

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Direct
and
Indirect
Finance

Indirect Finance: Borrowers borrow funds

through financial intermediaries(banks,
insurance companies, pension funds) in
the form of loans and deposits.

Banks issue a liability(saving deposits,

time deposits etc) use these funds to

acquire an asset by a loan to Honda
motors or by buying Honda motors bonds
in the financial markets.

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Function of the Financial Markets

INDIRECT FINANCE
Funds

Financial
Intermediaries

Funds

Funds
Lender-Savers
Households
Business firms
Governments
Foreigners

Funds

Financial
Markets

DIRECT FINANCE

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Borrower Spenders
Funds Business Firms
Governments
Households
Foreigners

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Why this channeling of Funds so

important for the economy?
Financial markets are essential to promote economic

efficiency.
Financial markets are essential to increase production
Financial markets are helpful to fulfill you dreams.
Financial markets enhance entrepreneurial
development and national welfare

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Functions of Financial Intermediaries

Financial intermediaries also do the function of

connecting people for investments.

Financial intermediaries are important as it;
Reduces transaction costs
Enables risk sharing
Removes information costs and moral hazards.

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Classification of Financial
Markets
Financial Market

Money Market

Primary

Call
Money
Commercial
Bills

Capital Market

Secondar
y

Primary

Stock
Market

Treasury
Bills

Secondar
y

Debt
Market

Mutual
Funds

Short
Term Loan
Market
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Types of Financial Markets

The financial markets can be divided into different
subtypes:
Capital markets which consist of:
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.

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Cont..
Commodity markets, which facilitate the trading of

commodities.
Money markets, which provide short term debt

financing and investment.

Derivatives markets, which provide instruments for

the management of financial risk.

Futures markets, which provide standardized forward

contracts for trading products at some future date.

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Cont..
Insurance markets, which facilitate the

redistribution of various risks.

Foreign exchange markets, which facilitate the

trading of foreign exchange.

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Primary and Secondary

Markets

The capital markets consist of primary markets and secondary

markets.
A primary market is a financial market in which new issues
of a security such as bond or stocks are sold to initial buyers
by the corporations or Government.
Secondary markets deals with securities that previously
issued. These securities are resold in these markets.

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Functioning of the Secondary

Markets
Secondary markets make the financial instruments
more liquid.
They determine the price of the securities those are
issuing firms sale in the primary markets.
So, condition in the secondary market enhances the
credibility of the corporations.
Hence, we will focus more on the functioning of the
secondary markets.
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Primary vs. Secondary

Markets

PRIMARY

New Issue of

Securities

SECONDARY

Trading Previously

Issued Securities
No New Funds for

Exchange of Funds

Issuer

for Financial Claim

Funds for Borrower;

an IOU for Lender

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Provides Liquidity for

Seller
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Money vs. Capital

Capital
Money
Markets
Long-Term, >1Yr
Short-Term, < 1 Year

Means of liquidity

adjustment
High Quality Issuers
Debt Only: low
default & low
market risk
Primary Market
Focus
Liquidity Market-Low Returns
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Principal fn: link b/w

long-term investors &

long term borrower
Range of Issuer
Quality
Debt and Equity: both
risks are substantial
Secondary Market
Focus
Financing Investment-Higher Returns
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Players in Money Market

Central Bank (Presiding Deity of Money

Market)-not only watchdog but also

promotional & development banker
Commercial Banks
Co-operative Banks
Discount & Acceptance Houses
Bills Market, Bullion Market etc.

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Organized vs. Over-theCounter

Markets
OTC
Organized
Visible

Marketplace
Members Trade
Securities Listed
New York Stock

Exchange
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Wired Network of

Dealers
No Central,

Physical Location
All Securities

Traded off the

Exchanges
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Indian Money Market

Unorganized
indigenous bankers & money
lenders
They advance loan against
collateral security
Outside the control of the central
bank
Rate of interest differ from the
organized sector

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Organized
Consist of RBI, SBI & its
subsidiaries, commercial banks,
finance corp, bill market & bullion
market
Mumbai, Kolkata & Delhi are
principal centres

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Banking System-Dominant
force in the Indian Money
Market
Reserve Bank of India (RBI)

Non Scheduled Banks

Scheduled Banks

State Cooperative
Banks

Central Cooperative Banks

& Primary Credit
Societies

Commercial
Banks

Foreign Banks

Indian Banks

Pub-Sector Banks
SBI & its
associates

Non-Scheduled
Commercial
Banks

Nationalized
Banks

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Pvt Sector Banks

Regional
Rural Banks
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Securities Traded in Financial

Markets
Money Market Securities
Debt securities Only

Capital market securities

Debt and equity securities

Derivative Securities
Financial contracts whose value is derived from the

values of underlying assets

Used for hedging (risk reduction) and speculation
(risk seeking)
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Financial Market Analysis

Financial Market Analysis deals with the performance

of a particular financial market (s). The performance

of a financial market depends upon the performance
of the total number of securities that are traded in that
market.
On a given day when the market closes with the prices
of most of its securities on the higher side, then it could
be said to have performed well.

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Cont..
This is reflected in a market indicator called Index

which tracks the performance of some of the more

popular and steady securities that are traded in that
particular financial market.

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Market indexes of the

Footsie London financial market
world
Dow Jones New York financial market
Hang Seng Hong Kong financial

market
BSE Sensex Mumbai financial market
Nikkei Tokyo financial market
Nifty Indian national financial market
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THE END

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