FINANCIAL MARKETS

CONCEPT OF FINANCIAL
MARKET
• A financial market is a market for the creation and exchange of
financial assets.
• Financial transactions could be in the form of creation of financial
assets or exchange such as the: initial issue of shares and debentures
by a firm or the purchase and sale of existing financial assets like
equity shares, debentures and bonds.
• The market in which long term, intermediate and short terms funds
are dealt is known as FINANCIAL MARKET
•
FUNCTIONS OF FINANCIAL
MARKET
• Mobilization of Savings and Channeling them into the most Productive
Uses:
• Facilitate Price Discovery:
• Provide Liquidity to Financial Assets:
• Reduce the Cost of Transactions:
MONEY MARKET (near money)

• The money market is a market for short term funds which deals in
monetary assets whose period of maturity is up to one year. Since
the maturity period is very short they are also called Near money.
• It is a market where low risk, unsecured and short term debt
instruments that are highly liquid are issued and actively traded
everyday.
• It has no physical location, but is an activity conducted over the
telephone and through the internet. The major participants in the
market are the Commercial Banks, Non-Banking Finance Companies,
State Governments, Large Corporate Houses and Mutual Funds.
• INSTRUMENTS OF MONEY MARKET
• Commercial Bills
• TREASURY BILLS
• COMMERICAL PAPERS
• CALL MONEY
• Commercial Bill
• It is a bill of exchange used to finance the working capital
requirements of business firms.

• When goods are sold on credit, the buyer becomes liable to make
payment on a specific date in future.

• It is also called a trade bill.

• These bills can be discounted with a bank if the seller needs funds
before the bill matures.
• When a trade bill is accepted by a commercial bank it is known as a
commercial bill.
• Treasury bill (T-Bill)
• Treasury bills (T-bills) offer short-term investment opportunities,
generally up to one year.
• They are thus useful in managing short-term liquidity.
• Issued in the form of a promissory note (A document signed by a
borrower promising to repay a loan under agreed-upon terms.)
• Issued by RBI on behalf of the Government.
• At present, the Government of India issues three types of treasury
bills through auctions, namely, 91-day, 182-day and 364-day.
• There are no treasury bills issued by State Governments.
• Treasury bills are available for a minimum amount of Rs.25,000 and in
multiples of Rs. 25,000.
• Treasury bills are issued at a discount and are redeemed at par.Known
as Zero Coupon Bonds.

• Zero coupon bond means a financial instrument for which no interest

is paid but it is issued at a discount.

• Meaning thereby, it is issued at a price less than the face value while
the payment is made equal to its face value
• Commercial Paper
• CP are those unsecured promissory Notes which are issued by well
reputed companies. Corporate, primary dealers (PDs) and the All-
India Financial Institutions (FIs) are eligible to issue CP.
• The buyers are banks, insurance companies, unit trust and firms.
• CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Maturity period of 15 days to one year.
• It is used to meet the demand of a short –term seasonal need and the
requirement of working capital Sold at discount and redeemed at par
• For example: In order to expand its business a company is going to
issue equity shares. The company shall have to bear heavy floatation
costs. The money spend in meeting the floatation costs can met by
issuing CP. This is known as Bridge Financing.
• Call Money Or Call Loan
• It is short term finance repayable on demand.

• Maturity period of the loan is between one and 15 days.

• On this basis it can be said that call loans are absolutely liquid.
• They are considered almost equal to cash.
• Commercial banks have to maintain a minimum cash balance known
as cash reserve ratio.
• Call money is a method by which banks borrow from each other to be
able to maintain the cash reserve ratio. The interest rate paid on call
money loans is known as the call rate.
CAPITAL MARKET
• Methods of Floatation
• Offer through Prospectus (Public issue): A prospectus makes
a direct appeal to investors to raise capital, through an
advertisement in newspapers and magazines. The contents of
the prospectus have to be in accordance with the provisions
of the Companies Act and SEBI disclosure and investor
protection guidelines
• Offer for Sale: securities are not issued directly to the public
but are offered for sale through intermediaries like issuing
houses or stock brokers. Securities are sold at an agreed price
to brokers who, in turn, resell them to the investing public.
• Private Placement:

Under this method, the company sells securities to the big

financial institutions or brokers instead of selling them to
general public. They, in turn, sell these securities to the
selected clients at a higher price. This method is preferred as
it is a cheaper method of raising funds as compared to
public issue.
Rights Issue:

This is a privilege given to existing

shareholders to subscribe to a new issue of
shares according to the terms and conditions
of the company. The shareholders are offered
the ‘right’ to buy new shares in proportion to
the number of shares they already possess.
• Electronic initial public issue ( e- IPOs):
It is an on-line system of the stock exchange to issue
capital, through internet. The companies issuing
securities through this medium has to enter into an
agreement with the stock exchange. This is called an
Initial Public Offer (IPO). SEBI registered brokers have to
be appointed for the objective of accepting
applications. This broker regularly sends information
about it to the company. The company issuing security
also appoints a registrar, who helps in making the issue
a success by establishing contact with the stock
• SECONDARY MARKET
• The secondary market is also known as the stock market or stock
exchange. It is a market for the purchase and sale of existing
securities.
• It provides liquidity and marketability to existing securities.
• It contributes to economic growth by channelize funds towards the
most productive investments through the process of disinvestment
and reinvestment.
• Securities are traded, cleared and settled within the regulatory
framework prescribed by SEBI.
• STOCK EXCHANGE
• Meaning of Stock Exchange
• “According to Securities Contracts (Regulation) Act 1956, stock
exchange means any body of individuals, whether incorporated or
not, constituted for the purpose of assisting, regulating or controlling
the business of buying and selling or dealing in securities.”
• After the reforms of 1991, the Indian secondary market acquired a
three tier form. This consists of:
• Regional Stock Exchanges
• National Stock Exchange (NSE)
• Over the Counter Exchange of India (OTCEI)
• TWO MAJOR STOCK INDEXES IN INDIA
• SENSEX of Bombay Stock Exchange
• Nifty of National Stock Exchange
• LISTING OF SECURITIES
• When company wishes that its securities should be transacted in a
particular stock exchange, it will have to apply to that stock exchange
for permission, if the managing committee in that stock exchange is
satisfied, the security of the comp is then included in the official list of
the stock exchange
• SENSEX
• Index showing the rise and fall in the market price of shares on the
basis of 30 comp of the Bombay Stock Exchange is called SENSEX