Financial Markets

By: Vishal Chopra

Financial System
Financial system is characterized by the presence of an

integrated, organized and regulated financial markets and institutions that meet the short term and long term financial needs of both the household and corporate sector
An institutional framework existing in a country to enable

financial transactions

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products

Flow of funds (savings)

Seekers of funds (Mainly business firms and government) Suppliers of funds (Mainly households)

Flow of financial services Incomes , and financial claims

Financial System

Contd..
It helps in lowering the cost of transactions and

increase returns It provides a mechanism for managing and controlling the risk involved in mobilizing savings and allocating credit Financial system also offers portfolio adjustment facilities It provides detailed information to the operators/players in the market such as individuals, business houses and government etc

Organized Indian Financial System

Regulators

Financial Instruments

Financial Markets

Financial Intermediaries

Forex Market

Capital Market

Money Market

Credit Market(Long term Primary Market bonds/loans) Secondary Market

Money Market Instrument

Capital Market Instrument

Financial Markets
Financial markets are the credit markets catering

to the various credit needs of the individuals, firms and institutions broadly classified as negotiated loan markets and open markets

Functions:
1. To facilitate creation and allocation of credit and liquidity 2. To serve as intermediaries for mobilization of savings 3. To assist the process of economic growth 4. To cater to the various credit needs of the

Classification of Financial Market

Money Market

Capital Market
Forex Market

Contd..
Unorganized and Organized Market:

Money Market
It is a place for Large Institutions and government to

manage their short-term cash needs

It is a subsection of the Fixed Income Market It specializes in very short-term debt securities

They are also called as Cash Investments

Defects of Money Market

Lack of Integration Lack of Rational Interest Rates structure

Absence of an organized bill market

Shortage of funds in the Money Market

Seasonal Stringency of funds and fluctuations in

Interest rates
Inadequate banking facilities

Money Market Instruments

Treasury Bills Commercial Paper

Certificate of Deposit
Money Market Mutual Funds

Repo Market

Capital Market
A Capital Market may be defined as an organized

mechanism for effective and efficient transfer of money-capital or financial resources from the investing parties to the entrepreneurs engaged in industry or commerce in the business either be in the private or public sectors of an economy

Why Capital Markets Exist

Capital markets facilitate the transfer of capital

(i.e. financial) assets from one owner to another. They provide liquidity.
Liquidity refers to how easily an asset can be

transferred without loss of value.

A side benefit of capital markets is that the

transaction price provides a measure of the value of the asset.

Role of Capital Markets

Mobilization of Savings & acceleration of Capital

Formation Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services

Money Market Vs Capital Market

It is for short term Supplies funds for WC Instruments are T-bill, CM, etc Each single instrument is of large amount Central bank and Commercial banks are major.

It is for long term Supplies funds for fixed capital requirement Instruments are shares, debentures, etc. Development bank and insurance companies are major.

Conti..

These instruments do not have secondary market. Transactions are on over phone and no formal place Transaction without the help of broker.

These instruments have secondary market. Transactions are at formal place. Eg stock market. Transaction have to be conducted with the help of broker.

CAPITAL MARKET

The market where investment instruments like bonds, equities and mortgages are traded is known as the capital market.

The prime role of this market is to make investment from investors who have surplus funds to the ones who are running a deficit.

 The capital market offers both long term and overnight

funds.

The different types of financial instruments that are traded in the capital markets are:
> equity instruments > credit market instruments, > insurance instruments, > foreign exchange instruments, > hybrid instruments and > derivative instruments.

Nature of capital market

The nature of capital market is brought out by the following facts: It Has Two Segments It Deals In Long-Term Securities It Helps In Capital Formation It Helps In Creating Liquidity

Types of capital market

There are two types of capital market: Primary market, Secondary market

Primary Market

It is that market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. This market is concerned with new issues. Therefore, the primary market is also called NEW ISSUE MARKET.

 In this market, the flow of funds is from savers to

borrowers (industries), hence, it helps directly in the capital formation of the country.

The money collected from this market is generally

used by the companies to modernize the plant, machinery and buildings, for extending business, and for setting up new business unit.

Features of Primary Market

It Is Related With New Issues It Has No Particular Place It Has Various Methods Of Float Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii) Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public Offer It comes before Secondary Market

Secondary Market
The secondary market is that market in which the buying and selling of the previously issued securities is done. The transactions of the secondary market are generally done through the medium of stock exchange. The chief purpose of the secondary market is to create liquidity in securities.

 If an individual has bought some security and he now

wants to sell it, he can do so through the medium of stock
.

Features of Secondary Market

It Creates Liquidity

It Comes After Primary Market

It Has A Particular Place It Encourage New Investments

Structure of Capital Markets

Primary Markets
When companies need financial resources for its expansion, they borrow money from investors through issue of securities. Securities issued a) Preference Shares b) Equity Shares c) Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company. People who apply for these securities are: a) High networth individual b) Retail investors c) Employees d) Financial Institutions e) Mutual Fund Houses f) Banks
One time activity by the company.

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares are tradable through a private broker or a brokerage house. Securities that are traded are traded by the retail investors.

Helps in mobilising the funds for the investors in the short run.