The financial system of a country is an important tool for economic development of the country, as

it helps in creation of wealth by linking savings with investments. It facilitates the flow of funds form
the households (savers) to business firms (investors) to aid in wealth creation and development of
both the parties. The financial system is concerned with:-

• Allocation and Mobilization of savings • Provision of funds • Facilitating the Financial Transactions
• Developing financial markets • Provision of legal financial framework • Provision of financial and
advisory services.

Features of financial system –

1. It bridges the gap between savings and investment through efficient mobilisation and allocation
of surplus funds.

2. It helps a business in capital formation.

3. It helps in minimising risk and allocating risk efficiently.
4. It helps business to liquidate tied up funds.
5. The main objective is to formulate capital, investment and profit generation.
6. It provides effective financial as well as advisory services.
7. It protects investors through regulatory bodies like RBI, SEBI etc.

Functions of Indian Financial System- • It bridges the gap between savings and investment through
efficient mobilization and allocation of surplus funds • It helps a business in capital formation • It helps
in minimising risk and allocating risk efficiently • It helps a business to liquidate tied up funds • It
facilitates financial transactions through provision of various financial instruments • It facilitate trading
of financial assets/instruments by developing and regulating financial markets

Components
(1) Financial Institutions – Financial institutions are intermediaries of financial markets which
facilitate financial transactions between individuals and financial customers. It simply refers to an
organization (set-up for profit or not for profit) that collects money from individuals and invests that
money in financial assets such as stocks, bonds, bank deposits, loans etc.

There can be two types of financial institutions:

• Banking Institutions or Depository institutions – These are banks and credit unions that collect money
from the public in return for interest on money deposits and use that money to advance loans to financial
customers.
• Non- Banking Institutions or Non-Depository institutions – These are brokerage firms, insurance and
mutual funds companies that cannot collect money deposits but can sell financial products to financial
customers.

Financial Institutions may be classified into three categories:

• Regulatory – It includes institutions like SEBI, RBI, IRDA etc. which regulate the financial markets
and protect the interests of investors.

• Intermediaries – It includes commercial banks such as SBI, PNB etc. that provide short term loans
and other financial services to individuals and corporate customers.

• Non – Intermediaries – It includes financial institutions like NABARD, IDBI etc. that provide long-
term loans to corporate customers.

(2) Financial Markets – It refers to any marketplace where buyers and sellers participate in trading of
assets such as shares, bonds, currencies and other financial instruments. A financial market may be
further divided into capital market and money market. While the capital market deals in long term
securities having maturity period of more than one year, the money market deals with short-term debt
instruments having maturity period of less than one year.

(3) Financial Assets/Instruments – Financial assets include cash deposits, checks, loans, accounts
receivable, letter of credit, bank notes and all other financial instruments that provide a claim against a
person/financial institution to pay either a specific amount on a certain future date or to pay the principal
amount along with interest.

(4) Financial Services – Financial Services are concerned with the design and delivery of financial
instruments and advisory services to individuals and businesses within the area of banking and related
institutions, personal financial planning, leasing, investment, assets, insurance etc.

It involves provision of a wide variety of fund/asset based and non-fund based/advisory services and
includes all kinds of institutions which provide intermediate financial assistance and facilitate financial
transactions between individuals and corporate customers.

Financial Services

Financial Services may be simply defined as services offered by financial and banking institutions like
loan, insurance, etc. It involves provision of a wide variety of fund/asset based and non-fund
based/advisory services and includes all kinds of institutions which provide intermediate financial
assistance and facilitate financial transactions of both individuals and corporate customers.
Features of Financial Services

• Financial services are Intangible • Financial services are customer oriented • They are perishable in
nature and cannot be stored • They aid in distribution of risks

Fund Based Services – It refers to services that are used to acquire assets or funds for a customer. It
consists of –Primary market activities, Secondary market activities, Foreign exchange activities,
Specialized financial Services.

Important fund based services include –

• Leasing • Hire purchase • Factoring • Forfeiting • Mutual funds • Bill discounting • Credit Financing
• Housing Finance • Venture capital

Fee based services – When financial institutions operate in specialised fields to earn income in form
of fees, commission, brokerage or dividends it is called a Fee based Service. They include – • Issue
Management • Portfolio management • Corporate counseling • Merchant banking • Credit rating • Stock
broking • Capital restructuring • Bank Guarantee • Letter of Credit • Debt Restructuring

Utility and significance of financial services –

SIGNIFICANCE - • Channelizing the funds for economic growth and development of a country •
Implementing monetary and debt management policies of the government

UTILITY- • Financial Services form a major part of the Gross Domestic Product • It ensures there is
no shortage of funds for productive ventures • It reduces cost of transaction and borrowing by providing
an adequate financial structure and system • It helps in making good financial decisions • It aids in
allocation of risk and helps to minimize risk • It generates employment

What is an Equity Market? www.angelbroking.com, www.timesofindia.indiatimes.com

One of the benefits of trading in the share market is that investors can become partial
owners of a company. These shares, offered by companies in return for money, are called
equities. In the Indian stock market, equities are available for trading at the National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE). An equity market, also known as
the stock market, is a platform for trading in company shares. It is the place where buyers and
sellers meet to trade in listed companies. Listed companies are those entities that have offered
some part of their equity to public investors.
National Stock Exchange of India (NSE) - The National Stock Exchange of India Limited
(NSE) was established in 1992 by a group of leading Indian financial institutions at the behest
of the government of India to bring transparency to the Indian capital market. It was the first
exchange in the country to provide a modern, fully automated screen-based electronic trading
system which offered easy trading facility to the investors across the country. The capital
market (equities) segment of the NSE commenced operations in November 1994, while
operations in the derivatives segment commenced in June 2000. The NSE is the world's 12th-
largest stock exchange as of March 2016 with market capitalization of more than US$1.41
trillion.
Bombay Stock Exchange (BSE) - The Bombay Stock Exchange (BSE) is an Indian stock
exchange located at Dalal Street, Mumbai. Established in 1875, BSE is considered as the
world's fastest stock exchange, with a median trade speed of 6 microseconds. The BSE has an
overall market capitalization of $1.83 Trillion as of March, 2017, making it one of the world's
11th-largest stock exchanges.

Trading Equity- Equity may be traded in the primary market, when a company makes an
Initial Public Offering (IPO) and new securities may be bought. Shares that have already been
issued are bought and sold in the secondary market. Investors may also own private equity, that
is, shares of a company that is still private and not listed on the bourses. In order to trade in
equities, investors must have a demat account and trading account.

CAPITAL MARKET: A capital market is a type of financial market where long-term

securities are issued and traded. Capital Market deals with the borrowing and lending of long-
term finance (more than a year). Important Institutions of the Capital Markets are Stock
Exchanges, Commercial Banks, NBFC’s like Insurance Companies etc. The main instruments
of Capital Markets are Stocks, Shares, Debentures, Bonds, and Government Securities. In the
Capital Market, the risk is much greater in terms of degree and nature as it is a long-term
investment. On the other hand, the Capital Market provides fixed capital to buy land and
machinery etc. and caters the long-terms of the industrialists.

Functions of Capital Market: www.elearnmarkets.com

1. Economic Growth: Capital Market helps in the proper allocation of resources from the
people who have surplus capital to the people who are in need of capital. Thus, it helps in the
expansion of industry and trade of both public and private sectors leading to a balanced
economic growth in the country.

2. Promotes Saving Habits: After the development of Capital Markets, the taxation system,
and the banking institutions provide facilities and provisions to the investors to save more.
3. Stable and Systematic Security prices: Capital Markets helps to stabilize the prices of
stocks. Reduction in the speculative activities and providing capital to borrowers at a lower
interest rate help in the stabilization of the security prices.

4. Availability of Funds: Investments are made in Capital Markets on a continuous

basis. Both the buyers and sellers interact and trade their capital and assets through an online
platform. Stock Exchanges like NSE and BSE provide the platform for this and thus the
transactions in the capital market become easy.

Capital Market Intermediaries:

 Stock Exchanges: These include the NSE (National Stock Exchange), BSE (Bombay
Stock Exchange), MCX (Multi Commodity Exchange)
 Banks
 Insurance Companies
 Pension Funds
 Mutual Funds

Role of SEBI in Capital Market: www.elearnmarkets.com

The Securities Exchange Board of India (SEBI) regulates the functions of the Securities
Market in India. It was set up in 1988 but didn’t have any legal status until May 1992;
when it was granted powers to legally enforce its control over the financial market
intermediaries. With the bloom of the scale of actions in the financial markets, there were
a lot of malpractices taking place. Practices like a false issue, delay in delivery, violation
of rules and regulations of stock exchanges are on a rise. In order to curb these
malpractices, the Govt. of India decided to set up a regulatory body known as the
Securities Exchange Board of India (SEBI).

 Regulation of the activities of the stock market

 Protecting the rights of investors
 Ensuring the safety of the investments.
 To prevent malpractices and fraudulent activities.
 To develop a code of conduct for the intermediaries such as brokers, mutual fund
sellers etc.
Primary market: Also known as New Issue Market (NIM). It is the market place where
new shares are issued and the public buys shares directly from the company, usually
through an IPO. The company gets the amount on the sale of shares.

Agent- A securities firm is classified as an agent when it acts on behalf of its clients
as buyer or seller of a security. The agent does not own the security at any time
during the transaction. The agent may be given decision-making authority.

Bid: The bid price represents the maximum price that the buyer/buyers are willing to
give to buy a share.

Ask: This is the minimum price that the seller/sellers are willing to receive to sell
their shares.

Bull market: A bull market is when the share prices are rising and the public is
optimistic that the share price will continue to rise.

Bear Market: When the share prices are falling and the public is pessimistic about
the stock market, then it’s a bear market. The public is fearful and thinks that the
market will continue to fall and hence, selling increases in this market.

Blue chip stocks: These are the stocks of those reputed companies who are in the
market for a very long time, financially strong and have a good track record of
consistent growth and returns in the past many years. Their stocks have low risk
compared to mid-cap and small cap stocks.

Board lot: A board lot is a standardized number of shares defined by a stock

exchange as a trading unit. In most cases, this means 100 shares. The purpose of a
board lot is to avoid "odd lots" and to facilitate easier trading.

Stock Split: A stock split is a corporate action in which a company divides its existing
shares into multiple shares to boost the liquidity of the shares. When a company
declares a stock split, the number of shares of that company increases, but the
market cap remains the same. Existing shares split, but the underlying value remains
the same. As the number of shares increases, price per share goes down.

Thin Market: Buy & Sell orders are less with a low number of buyers and sellers.

Thick Market: Buy & sell orders are large with more number of buyers and sellers.
Trading session: A single day of business in the local financial market, from that
market's opening bell 9:15 a.m. to its closing bell 3.30 p.m., is the trading session
that the individual investor or trader will reference.

Yield: refers to the earnings generated and realized on an investment over a

particular period of time, and is expressed in terms of percentage based on the
invested amount or on the current market value or on the face value of the security.

Buy Side – is the side of the financial market that buys and invests large portions
of securities for the purpose of money or fund management.

Sell Side – is the other side of the financial market, which deals with the creation,
promotion, and selling of traded securities to the public.

Diversification: Diversification is a growth strategy that capitalizes on market

opportunities by allocating investment in various assets & reducing risk over different
asset classes.

IPO: When a privately listed company offers its sharers first time to the public to enter
the share market, then it is called initial public offering.

Portfolio: Holdings of securities by an individual or institution. A portfolio may

include various types of securities representing different companies and industry
sectors.

Debenture: A long-term debt instrument issued by corporations or governments

that is backed only by the integrity of the borrower, not by collateral. A debenture is
unsecured and subordinate to secured debt. A debenture is unsecured in that there
are no liens or pledges on specific assets.

Dividend: Whenever a company (whose shares you are holding) is in profit, the
company can either reinvest the profit or distribute the amount among its shareholders.
This share of the profit that you get from the company is called dividend.

Face value: is a financial term used to describe the nominal or dollar value of a
security, as stated by its issuer. For stocks, the face value is the original cost of the
stock, as listed on the certificate. For bonds, it is the amount paid to the holder at
maturity, which is customarily $1,000.
Equities: Common and preferred stocks, which represent a share in the ownership
of a company.

Equity: Value or interest an owner of realty has above ay debt on property; difference
between value and mortgage debt.

Bonds: Promissory notes issued by a corporation or government to its lenders or

buyers, usually with a specified amount of interest for a specified length of time.

Books: An electronic record of managing all pending buy & sell orders of particular
stocks.

Broker/ Brokerage Firms: A securities firm or a registered investment advisor

affiliated with a firm. Brokers are the link between investors and the stock market.
When acting as a broker for the purchase or sale of listed stock, the investment
advisor does not own the securities but acts as an agent for the buyer and seller
and charges a commission for these services.

Commodities: Products used for commerce that are traded on a separate,

authorized commodities exchange. Commodities include agricultural products and
natural resources such as timber, oil and metals. Commodities are the basis for
futures contracts traded on these exchanges.

Convertible Security: A security of an issuer (for example - bonds, debentures, or

preferred shares) that may be converted into other securities of that issuer, in
accordance with the terms of the conversion feature. The conversion usually occurs
at the option of the holder of the securities, but it may occur at the option of the
issuer.

Defensive Stock: A stock purchased from a company that has maintained a record
of stable earnings and continuous dividend payments through periods of economic
downturn.

Derivatives: A security or contract whose price is derived from one or more

underlying assets.
Hedge: A strategy used to limit investment loss by making a transaction that offsets
anexistingposition.

Income Stock: A security with a solid record of dividend payments and which offers
a dividend yield higher than the average common stock.

Index: A statistical measure of the state of the stock market, based on the
performance of stocks. Examples are the Sensex and Nifty.

Listed Stock: Shares of an issuer that are traded on a stock exchange. Issuers pay
fees to the exchange to be listed and must abide by the rules and regulations set
out by the exchange to maintain listing privileges.

Market Capitalization: It refers to the total rupee value of the company’s share. It is
calculated by multiplying the total number of shares by its present market share price.
It is used to define large cap, mid cap or small cap companies based on their market
capitalization.

Mutual Fund: A fund managed by an expert who invests in stocks, bonds, options,
money market instruments or other securities. Mutual fund units can be purchased
through brokers or, in some cases, directly from the mutual fund company.

Odd Lot: A number of shares that are less than a board lot, which is the regular
trading unit decided upon by the particular stock exchange. An odd lot is also an
amount that is less than the par value of one trading unit on the over-the-counter
market. For example, if a board lot is 100 shares, an odd lot would be 99 or fewer
shares.

One-Sided Market: A market that has only buy orders or only sell orders booked
for a particular security.

Price-Earnings (P/E) Ratio: A common stock's last closing market price per share
divided by the latest reported 12-month earnings per share. This ratio shows you
how many times the actual or anticipated annual earnings a stock is trading at.
Risk: The future chance or probability of loss.
Securities: Transferable certificates of ownership of investment products such as
notes, bonds, stocks, futures contracts and options.

Strike price: The strike price is defined as the price at which the holder of an options
can buy (in the case of a call option) or sell (in the case of a put option) the underlying
security when the option is exercised. Hence, strike price is also known as exercise
price.