• FINANCIAL MARKET

• In economics, a financial market is a mechanism that allows people to 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.

• In finance, financial markets facilitate:

• The raising of capital (in the capital markets)

• The transfer of risk (in the derivatives markets)

• International trade (in the currency markets)

• – And are used to match those who want capital to those who have it.

INDIAN FINANCIAL SYSTEM

Functions of Indian Financial Services

• Saving Function

• Liquidity Function

• Payment Function

• Risk Function

• Policy Function

• Defined as the market in which financial assets are created or transferred.

• These assets represent a claim to the payment of a sum of money sometime

in the future and/or periodic payment in the form of interest or dividend.

Classification of financial market

• Capital Market

• Money Market

• Capital Market
 • A capital market is a market for securities (debt or equity), where business
enterprises (companies) and governments can raise long-term funds. It is
defined as a market in which money is provided for periods longer than a
year

• The capital market includes stock market (equity securities) and the bond
market (debt).

• Money 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.

• It deals with substitute of cash like trade bills, promissory notes &
government papers which can be converted into cash without any loss at low
transaction cost.

• 4! IMPORTANCE OF MONEY MARKET?

• Development of trade & industry.

• Development of capital market.

• Smooth functioning of commercial banks.

• Effective central bank control.

• Formulation of suitable monetary policy.

• Non inflationary source of finance to government.

Importance of capital market

• Pooling the capital resources and Developing enterprising investors

• Solve the problem of paucity of funds

• Mobilize the small and scattered savings

• Augment the availability of investible funds

• Growth of joint stock business

• Provide a number of profitable investment opportunities for small savers.

• Classification of capital market

 • Primary market

• Secondary market

Primary market

• Primary market provides opportunity to issuers of securities, Government as

well as corporates, to raise resources to meet their requirements of
investment and/or discharge some obligation. The issuers create and issue
fresh securities in exchange of funds through public issues and/or as private
placement. When securities are exclusively offered to the existing
shareholders it is called ‘Rights Issue’ and when it is issued to selected
mature and sophisticated institutional investors as opposed to general public
it is called ‘Private Placement Issues’. Issuers may issue the securities at
face value, or at a discount/premium and these securities may take a variety
of forms such as equity, debt or some hybrid instruments. The issuers may
issue securities in domestic market and /or international market through
ADR/GDR/ECB route

Features of primary market

• This market is for new long term equity capital.- New Issue Market (NIM).

• In a primary issue, securities are issued by the company directly to

investors.

• The company receives the money and issues new security certificates to
the investors.

• Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.

• The primary market performs the crucial function of facilitating capital

formation in the economy.

• Borrowers in the new issue market may be raising capital for converting
private capital into public capital; this is known as "going public. “

• Secondary market

• Secondary market refers to a market where securities are traded after being
initially offered to the public in the primary market. In this, majority of the
trading is done in the secondary market and the trading is done through
stock exchanges.

• Secondary market comprises of equity markets and the debt markets.

• Call money Market

• The call money market refers to the market for extremely short period
loans; say one day to fourteen days. These loans are repayable on demand at
the option of either the lender or the borrower. As stated earlier, these loans
are given to brokers and dealers in stock exchange. Similarly, banks with
‘surplus’ lend to other banks with ‘deficit funds’ in the call money market.
Thus, it provides an equilibrating mechanism for evening out short term
surpluses and deficits. Moreover, commercial bank can quickly borrow from
the call market to meet their statutory liquidity requirements. They can also
maximize their profits easily by investing their surplus funds in the call
market during the period when call rates are high and volatile.

• Commercial Bill Market or Discount Market

• A commercial bill is one which arises out of a genuine trade transaction, i.e.
credit transaction. As soon as goods are sold on credit, the seller draws a bill
on the buyer for the amount due. The buyer accepts it immediately agreeing
to pay amount mentioned therein after a certain specified date. Thus, a bill of
exchange contains a written order from the creditor to the debtor, to pay a
certain sum, to a certain person, after a creation period. A bill of exchange is
a ‘self-liquidating’ paper and negotiable/; it is drawn always for a short period
ranging between 3 months and 6 months.

• Acceptance Market

• Banker’s acceptance, or BA, is a negotiable instrument or time

draft drawn on and accepted by a bank. Before acceptance, the draft is not
an obligation of the bank; it is merely an order by the drawer to the bank to
pay a specified sum of money on a specified date to a named person or to
the bearer of the draft. Upon acceptance, which occurs when an authorized
bank accepts and signs it, the draft becomes a primary and unconditional
liability of the bank. If the bank is well known and enjoys a good reputation,
the accepted draft may be readily sold in an active market.

• Treasury Bill Market

• A treasury bills nothing but promissory note issued by the Government under
discount for a specified period stated therein. The Government promises to
pay the specified amount mentioned therein to the beater of the instrument
on the due date. The period does not exceed a period of one year. It is purely
a finance bill since it does not arise out of any trade transaction. It does not
require any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is clams
against the Government. Treasury bill are issued only by the RBI on behalf of
the Government. Treasury bills are issued for meeting temporary
Government deficits. The Treasury bill rate of discount is fixed by the RBI
from time-to-time. It is the lowest one in the entire structure of interest rates
in the country because of short-term maturity and degree of liquidity and
security.