FINANCIAL MARKETS

Financial Markets
• Financial Markets are where financial
Instruments/products are exchanged.

• It is a Mechanism which allows people to trade

• Affected by forces of supply and demand

• A Financial Market is known by type of product

traded in it.
 Different Financial Markets

FINANCIAL MARKET

Money Debt Forex Capital

Market Market Market Market
 MONEY MARKET
As per RBI definitions “ A market for short terms
financial assets that are close substitute for money,
facilitates the exchange of money in primary and
secondary market”.
The money market is a mechanism that deals with the
lending and borrowing of short term funds (less than
one year).
A segment of the financial market in which financial
instruments with high liquidity and very short
maturities are traded.
 OBJECTIVE OF MONEY
MARKET

•To provide a parking place to employ short term

surplus funds.
•To provide room for overcoming short term deficits.
•To enable the central bank to influence and regulate
liquidity in the economy through its intervention in
this market.
•To provide a reasonable access to users of short-term
funds to meet their requirement quickly, adequately at
reasonable cost.
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.

They were
Treasury bills
Money at call and short notice in the call loan
market.
Commercial bills, promissory notes in the bill
market.
 Now, in addition to the above the following new
instrument are available:

 Commercial papers.
 Certificate of deposit.
 Inter-bank participation certificates.
 Banker's Acceptance
 Repurchase agreement
 Money Market mutual fund
CAPITAL MARKET
MEANING

 Capital market is an organized market for

effective and efficient mobilization of funds from the
numerous savers and transfers the funds to those who are in
need of money to finance business operations either in the
private sector or in the public sector.

 The capital market is the market for securities, where

companies and governments can raise long term funds.

 The capital market includes the stock market and the bond
market.
OBJECTIVES

 To mobilize resources for investments.

 To facilitate buying and selling of securities.

 To facilitate the process of efficient price discovery.

 To facilitate settlement of transactions in accordance with the

predetermined time schedules.
CLASSIFICATION OF CAPITAL MARKET

CAPITAL
MARKET

PRIMARY SECONDARY
MARKET MARKET
PRIMARY MARKET

 Market for new long term capital. It is also called New

Issue Market (NIM)
 In a primary issue, the securities are issued by the
company directly to investors
 Primary issues are used by companies for the purpose of
setting up new business or for expanding or modernizing
the existing business
 Performs crucial function of facilitating capital
formation in the economy
TYPES OF SECURITIES
SECONDARY MARKETS

 Secondary market refers to a market where securities are

traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange
 Majority of the trading is done in the secondary market

 It is the market where shares, bonds, debentures and other

securities are traded.
 Once these securities are floated, subscribed to and issued
to the public, they are traded in the secondary market,
which is called 'Stock Market'.
 An active secondary market in turn encourages investors to
subscribe to the securities in the primary market.
 The market where securities are traded is called the 'Stock
Exchange'.
 Presently there are 23 Stock Exchanges in the country.

 Bombay Stock Exchange (BSE) is the oldest and principal

Stock Exchange in India.
 During the last decade, National Stock Exchange (NSE) has
become the premier stock exchange in the country.
 The Securities and Exchange Board of India (SEBI) overviews
and governs the functioning of Stock Exchanges and their
participants
CAPITAL MARKET INSTRUMENTS

Capital market instruments can be broadly divided

into two categories namely

• Debt, Equity and Hybrid instruments.

• Derivative Products like Futures, Option.
FOREIGN EXCHANGE MARKET
DEFINITION
 The foreign exchange market is a worldwide
decentralized over-the-counter financial market for the
trading of currencies.
 The primary purpose of the foreign exchange market is
to assist international trade and investment, by allowing
businesses to convert one currency to another currency.
 The data indicate the currency market expanded to more
than $4.1 trillion in daily trading from $3.2 trillion in
2007.
 Major currencies : US Dollar, Euro, Japanese Yen, british
Pound, Swiss Franc
FOREIGN EXCHANGE MARKETS IN INDIA – A
BRIEF BACKGROUND
• It started in 1978, when government allowed banks to
trade foreign exchange with one another.
• Today over 70% of the trading in foreign exchange
continues to take place in the inter-bank market.
• Trading is regulated by the Foreign Exchange Dealers
Association of India (FEDAI), a self regulatory
association of dealers.
• From 2000-01 to 2005-06, volume of forex has grown
more than Tripled.
• And now growing at a compounded annual rate
exceeding 25%.
 FEATURES:
• huge trading volume, leading to high liquidity
• geographical dispersion
• Accessibility to all traders in Currency markets
• continuous operation: 24 hours a day except weekends.
• High efficiency relative to other financial Markets
• The complete Forex market functions to transfer
purchasing power between nations. When trades are
created, partners are converting currency revenues into
their domestic currency.
• the use of leverage to enhance profit margins with
respect to account size
CONTD...
• As it is of global nature. Its also simultaneously present
in many countries
 For example: Paris, Tokyo, London and New York.

• the foreign exchange market is an economic organization

without proper regulation, it is self-organized by public
and private that intervenient.
INSTRUMENTS

• Spot

• Forward

• Future

• Swap

• Option
PARTICIPANTS OF FOREX
• Governments and Central Banks –
implementing monetary and economic
policies (non profit oriented)

• Banks and Investment Banks –

providing services for their commercial
customers or trading own accounts
(proprietary trading);
• Hedge Funds – leverage and diversify
their investments;

• Businesses – international trade;

• Individuals and SME-s – trade currencies

for purchases or speculation.
ROLE OF FINANCIAL MARKET IN ECONOMIC
DEVELOPMENT.
 The Financial Market plays an important role in promoting
economic growth
 By mobilizing savings for productive investment and facilitating capital
inflows it stimulates investment in both physical and human capital.
 Channels savings to more productive uses by collecting and analyzing
information about investment opportunities.
 Creates an efficient mechanism for transactions in long term financial
instruments, it provides a wide range of wealth creating opportunities for
the Government, Corporations, Private individuals, and other financial
institutions.
 It allows an increasing part of savings to be used on investment
financing.
 It increases the productivity of capital in allocating savings toward the
most profitable projects,