12th Com SP

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Financial Market
People perform the economic activities for earning income such as Employment – Salary or wages,
Profession – Fees and Business – Profit. This income used by the people for satisfy personal, family and social
needs. It means income used for consumption. Saving is a portion of the income which is kept aside after the
payment of consumption. Saving means any income remains after the consumption of goods and services or
satisfy the various needs. For increase saving people either increase income or reduce the consumption. When
saving is used for earning extra income, is known as investment. The investment provides returns to investors
in the form of dividend, rent, interest, etc. Normally people invest money in the bank deposits, gold, real
estate, mutual funds or corporate securities. Banks & Mutual Fund Companies use deposits for providing loan
or investment in the corporate securities. The Corporate securities and loan are the sources of finance for
business sector. It provides opportunities to people for economic activities. It is a cycle of money. This cycle
considered as financial market.
In economy individuals, corporates, Government etc. may have excess funds and may want to invest it,
they are known as Investors. On the other hand there may be businessmen, corporates, Governments etc.
which may need funds who are called as Borrowers. The investors lend money to the Borrowers through a
market called as Financial Market. It acts as an intermediary, which makes possible the transfer of funds from
the savers to the investors and investors to the borrowers. They actually bring together the lenders of funds
and borrowers of funds.
❖ “Financial market is a market for the creation and exchange of financial assets such as shares,
debentures, bonds and government securities.”
❖ “The place where people and organization wanting money are bought together with those having
surplus funds is called financial market.”
❖ “Financial markets are the market, which act as an intermediary and makes possible the transfer of
funds from the investors to Borrowers.”
Economic
Activities
Income
SavingInvestment
Finance

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From the above definition, it is clear that financial market is a particular physical place or virtual place
where financial instruments are exchanged between buyer and seller. This market deals with financial services
which are used by the people and organization. This market deals with various types of instruments such as
commercial papers, promissory notes, commercial bills, deposits, loans, shares, debentures, bonds,
derivatives, etc.
Role/Functions/Features/Nature/Importance
1. Mobilizing Funds: Financial Market collect the savings from individuals and institutions. It encourages the
investors to invest their savings according to their choices and risk management. It facilitates the transfer
of saving from savers to investors. Financial market offers different investment avenues to savers help to
channelize their savings into most productive use.
2. Capital Formation: Normally, People invest their savings into bank deposits, gold, real estate, mutual fund
and corporate securities. The bank deposits, mutual fund and corporate securities provide finance
indirectly or directly to business sector for satisfying their capital requirement; it is known as Capital
Formation. Financial Market provides a channel through which savings flow to industrial and commercial
organizations in the form of capital.
3. Transfer Resources: Financial Market act as an intermediary between lenders and borrowers funds. It
makes possible the transfer of money from the investors to the entrepreneurial borrowers. It facilitates
the transfer of real economic resources from lenders to ultimate users.
4. Productive Uses: It allows productive use of funds. In the hands of the investors their excess funds would
have remained idle. Borrowers use these funds for productive purposes. Business sector use finance for
satisfying their fixed capital and working requirements. These funds also used for development of
entrepreneurship.
5. Enhancing Income: Financial Market provides chance to savers/lenders to earn extra income on their
savings by investment. It allows lenders to earn interest or dividend on their surplus funds, thus it leads
increase the individual income and the national income.
6. Price Determination: Price of any product is determined by the forces of demand and supply.
Savers/lenders represent the supply of funds and the Borrowers (business firms) represent the demand.
The interaction between savers (investors) and business firms facilitates the price determination for the
financial assets, which is being traded in a particular market.
7. Sales Mechanism: Financial Market provides a mechanism for selling of financial asset by an investor so as
to offer the benefit of marketability and liquidity of such assets.

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8. Liquidity: Financial Market facilitates easy purchase and sale of financial instruments. It provides platform
or proper place to investors where the securities are converted into cash easily. The secondary market or
stock market provides liquidity to the financial instruments. At present due to online trading and
dematerialization the investor convert their investment into within few seconds.
9. Easy Access: Both investors and industries need each other. The financial market provides a platform
where both the buyers and sellers can find each other easily.
10. Reduce Cost of Transaction: The valuable information about the securities is provided through financial
market. It is very helpful for buyers and sellers of financial securities and they can save their time, efforts
and money in their dealings. They provide common platform, where buyers and sellers can meet for
fulfillment of their individual needs.
11. Industrial Development: Financial Market provides finance to business sectors. Corporates use the funds
of investors to undertake productive or commercial activities. Business sector also get finance for research
and development and entrepreneurship programs, it will be industrial development and economic
development.
Money Market
❖ “Money Market is a market where financial instruments with high liquidity and very short maturities are
traded”.
❖ “Money market is the collective name given to the various firms and institutions that deal in the various
grades of the near money.” ____Geoffrey
❖ “A market for short terms financial assets that are close substitute for money facilitates the exchange of
money in primary and secondary market”. _____ RBI
❖ “Money market refers to the market where money and highly liquid marketable securities are bought and
sold having a maturity period of one less than one year”.
From the above definition it is clear that money market is a market that provides short term funds to
the organizations for satisfying working capital requirement. In the money market financial instrument are
very close substitute for money. They are considered equal to currency. It is an important part of the financial
system that helps in fulfilling the short term and very short term requirement of companies, banks, financial
institutions, government agencies etc.
Features
1. Short-term Funds: Money Market provides market for borrowing and lending of short term funds. The
maturity period of these instruments can be one day, one week, one month or up to one year. They
provide finance for satisfying working capital requirement.
2. Large Volume: Money market instruments face value is high compare to capital market instruments. It is a
wholesale market for short term debt as the transactions volume is large.
3. No Fixed Place: Money market is conducted by borrowers and investors at any time and any place, so it
does not have any fixed place for the transactions. It has no geographical area.
4. Written Communication: In the money market trading may take place over the telephone, after which
written communication is done by way of e-mails. It is very important in the trading, because written
communication considered evidence of transactions.

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5. Relative Nature: Money Market differs from place to place and person to person. The rules & regulations
of the money market always change as per the place and person. In the money market investors always
discriminate borrowers. The rate of interest, maturity period and nature of instruments always change
place to place and person to person. Money market is not fully organized. The transactions of the money
market are not recorded by the any Govt. authorities. For the transactions not require broker. So money
market is relative nature.
6. Participants: Participants of money market include RBI, Central & State Government, Public Sector
Undertakings, Commercial Banks, Cooperative Banks, Insurance Companies, Mutual funds, Non-Banking
Finance Companies, Corporates, Primary Dealers, Money Lenders, etc.
7. Impersonal Relationship: In the money market participants make transactions with each other without
connection or reference; it is totally impersonal relationship between them.
8. Liquidity: One of the key features of these financial assets is high liquidity offered by them. They generate
fixed-income for the investor and short term maturity makes them highly liquid. Due to this characteristic
money market instruments are considered as close substitutes of money. In the money market return on
investment is low.
9. Helps in monetary policy: A developed money market helps RBI in efficiently implementing monetary
policies. Transactions in the money market affect short term interest rate, and short-term interest rates
gives an overview of the current monetary and banking state of the country. This further helps RBI in
formulating the future monetary policy, deciding long term interest rates, and a suitable banking policy.
10. Major Segments: Major segments of money market are Call money market, Certificate of Deposits market,
Treasury bill market, Commercial Bill market and Commercial Paper market.
Participants in Money Market
1. Reserve Bank of India: RBI plays a vital role in the money market. RBI acts as central bank of the India. It is
the monetary authority and is regarded as an apex institution. No money market can exist without the
central bank. The central bank is the lender of the last resort, intermediary, regulator, controller and
guardian of the money market. By the money market RBI regulates money supply and implements its
monetary policy. It issues government securities on behalf of the government and also underwrites them.
2. Central and State Government: Central Government is a borrower in the Money Market, by the issue of
Treasury Bills (T-Bills) and Government Securities. These instruments are issued to finance the government
as well as for managing the Government’s cash flow. T-bills are issued by the Reserve Bank of India. It
represents zero risk instruments. Due to its risk free nature banks, corporates, etc. buy the T-bills and
provide finance to government. The State Governments issue securities termed as State Development
Loans (SDLs), which are medium to long-term maturity bonds floated to enable State Governments to fund
their budget deficits.
3. Public Sector Undertaking (PSU): PSU are listed government companies. They can issue commercial
papers to finance the working capital requirements. Like any other business organization, PSUs generate
large cash surpluses. Such PSUs are active investors in instruments like Fixed Deposits, Certificates of
Deposits, Government Securities and Treasury Bills.
4. Scheduled Commercial Banks: The scheduled commercial banks are those banks which are included in the
second schedule of RBI Act 1934 and which carry out the normal business of banking such as accepting

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deposits, giving out loans and other banking services. These are very big borrowers and lenders in the
money market. They deal in call money, notice money, commercial bills, commercial papers, certificate of
deposits, T-bills, Government Securities, etc. Commercial banks are the back bone of the money market.
They form one of the major constituents of the money market. These banks use their short term deposits
for financing trade and commerce for short periods.
5. Insurance Companies: Both the life and general companies are acts as lenders in the money market. Their
role in the money market is limited. They participate in the G-Sec, T-bills and short term money market as
lenders. They maximum invest in capital market instruments
6. Mutual Fund: A mutual fund is a type of financial vehicle made up of a pool of money collected from
many investors to invest in securities like stocks, bonds, money market instruments, and other assets. A
mutual fund is a professionally-managed investment scheme, usually run by an asset management
company that brings together a group of people and invests their money in stocks, bonds and other
securities. Mutual Fund Companies offer varieties schemes for different investment objectives of the
public. Mutual funds schemes are liquid schemes. These schemes have the investment objective of
investing in money market instruments.
7. Non-Banking Finance Companies: Non-Banking Financial Companies (NBFCs) are the financial institutions
that offer the banking services, but it does not hold a bank license. These are registered under the
Companies Act, 2013 and deals in the business of loans and advances, investments in bonds, shares,
debentures, stock and other marketable securities Viz. Lease, hire-purchase, insurance business, but do
not include any institution which is principally engaged in the business of agricultural activity, purchase of
any goods and services (other than securities), industrial activity and sale, purchase and construction of
immovable property. NBFCs use their surplus funds to invest in T-bills, Government Securities and other
money market instruments.
8. Corporates: Corporates borrow by issuing commercial papers and commercial bills. Companies with cash
surpluses are active investors in instruments like Fixed Deposits, Certificates of Deposit and Treasury Bills.
Some of these companies with active treasuries are also active participants in the G-Sec and other debt
markets
9. Primary Dealers: A primary dealer is a firm that buys government securities directly from a government.
Their intention is to resell the securities to others. Thy act as a market maker of government securities. In
1995, the Reserve Bank of India (RBI) introduced the system of Primary Dealers (PDs) in the Government
Securities Market which comprised independent entities undertaking Primary Dealer activity. Their main
role is to promote transactions in government securities. They buy as well as underwrite the government
securities.
Instruments of Money Market
1) Call Money and Notice Money: Call Money, Notice Money and Term Money Market are an important
segment of the money market in India. Call Money is the borrowing or lending of funds for 1day. If money
is borrowed or lend for period between 2 days and 14 days it is known as Notice Money. Term Money
refers to borrowing/lending of funds for period between 15 days and one year. Funds have to be repaid
within a specified time on the receipt of notice given by lender. When one bank faces temporary shortage
of cash, then another bank with surplus cash lends money to it. Hence Call/Notice money market is also

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known as Call Money market. Call money is a method by which banks borrow mutually to maintain CRR
(Cash Reserve Ratio), CRR is the minimum balance a commercial bank should maintain with RBI. Call
money loan also available to stock brokers, jobbers and primary dealers.
2) Treasury Bills: Treasury Bills are short term securities issued by Reserve Bank of India on behalf of the
Central Government of India to meet the government’s short term funds requirement. Treasury Bills have
three maturity periods – 91 days, 182 days and 364 days. These are sold to banks, individuals, firms,
institutions etc. Treasury bills are available for a minimum amount of 25000 and in multiple thereof. It
does not carry interest. Treasury bills are also known as ‘Zero Coupon Bonds’ since they do not pay any
interest but the issue price is less than their face value and repaid at par. This difference is the interest
receivable on them. The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills.
RBI also issue Treasury Notes (1 to 10 years) and Treasury Bonds (more than 10 years).
3) Trade Bills / Commercial Bills: Normally the traders buy goods credit. The sellers get payment after the
end of the credit period. But if any seller does not want to wait or in immediate need of money he/she can
draw a bill of exchange in favour of the buyer. When buyer accepts the bill it becomes a negotiable
instrument and is termed as bill of exchange or trade bill. These have short-term maturity period generally
of 30 days, 60 days or 90 days and can be easily transferred to another. This trade bill can now be
discounted with a bank before its maturity. On maturity the bank gets the payment from the drawee i.e.,
the buyer of goods. When trade bills are accepted by Commercial Banks it is known as Commercial Bills, So
trade bill is as instrument, which enables the drawer of the bill to get funds for short period to meet the
working capital needs.
4) Commercial Papers: Commercial Paper is debt instrument issued by the corporate houses for raising short
term finance. It is an unsecured promissory note issued by highly rated companies, All India Financial
Institutions (i.e. SIDBI, IFCI, EXIM Bank, etc.) and Primary Dealers with a fixed maturity period which varies
from 7 days to maximum 1 year. As the instrument is not backed by collateral, only large firms with
considerable financial strength are authorized to issue the instrument. It has a maturity period of 15 days
to one year. It is sold at a discount and redeemed at par. Interest rate on commercial paper usually is
lower than the market rate. CP is available for a minimum amount of 5 lakhs or multiples thereof. CP is
as an important source of working capital and for bridge financing (to meet flotation cost, brokerage,
advertising, printing share applications etc.) for raising long term funds from capital market. Commercial
banks and mutual funds contribute towards this kind of instruments.
5) Certificate of Deposits: It is an unsecured, negotiable, short term promissory note in bearer form, issued
by commercial banks and financial institutions to individuals, corporations and companies. Certificate of
deposit is similar to term deposit. However, it differs from term deposit in two aspects. Certificate of
Deposit is issued only for large amount and freely negotiable. It can be issued for minimum value of 1
lakh or its multiples of 1 lakh. They have maturity period Min. 7 days and Max. 1 year (Financial
Institutions – 3 years). Certificate of deposit is issued by commercial banks and selected financial
institution approved by RBI.
6) Government Securities: The marketable debt instruments issued by the Central Government, State
Government, Semi-Government, Local Self Government (Municipalities), Statutory Corporations and
Government Companies which represent claim directly or indirectly on the government is known as
Government Securities. These securities may in form of promissory notes, commercial papers or any other

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short term instrument. These securities are safe investment as payment of interest and repayment of
principal amount are guaranteed by the government. These securities are highly liquid so easily convert
into cash. The investment in government securities provide rebate in income tax to the investors.
7) Repo or Repurchase Rate: A repurchase agreement, also known as a repo loan, is an instrument for
raising short-term funds. It is an agreement where the seller of securities agrees to buy from the lender at
a higher price on future date. One party sells securities and borrows cash and commits to buying the
security back at a future date. The buying back part of the agreement gave them the name of “repurchase
agreement”. Repo rate is the rate at which commercial banks borrow money from central bank (RBI) for a
short period by selling their securities to the central bank with an agreement to repurchase them at a
future date at a predetermined date. Reverse repo rate is the rate at which RBI borrow from other banks.
RBI uses repo rate and reverse repo rate for controls the money supply in the economy. These agreements
are the most liquid of all money market investments having maturity ranging from 24 hours to several
months.
8) Money Market Mutual Fund: It is an indirect method to invest money in the money market. Mutual fund
companies collects saving from the public and invests in money market instruments like commercial
papers, certificate of deposits, Treasury bills, Govt. Securities, etc. These securities are highly liquid and
provide safety of investment, thus making money market / liquid funds the safest investment option when
compared with other mutual fund types.
9) Advances from Banks: Commercial bank also provide short term loans and advances to industries and
commercial organizations. It includes cash credit, overdraft, cash loans, discounting of bills, etc. The
maturity period of these loans is up to 1 year. For this loan business organizations may or may not be
provide any mortgage to the bank as a security.
10) Loans from Unorganized Money Market: The Organized sector of the money market consists of the
Reserve Bank of India, commercial banks, companies lending money, financial intermediaries such as the
Life Insurance, Credit and Investments Corporation of India, Unit Trust of India, Land Mortgage Banks,
Cooperative Banks, Insurance Companies etc. and call loan brokers, and stock brokers. The Unorganized
sector of the money market is largely made up of indigenous bankers, money lenders, chit funds, nidhis,
traders, commission agents etc., some of whom combine money lending with trade and other activities.
They make the transactions based on mutual understanding. They many times follow the unethical and
illegal activities for transactions. The interest rates are generally high. The amount of instruments and rate
of interest is highly relative (differ). This market does not controlled by RBI or any other body. The
unaccounted money or black money as part of the unorganized money market is invested in property,
smuggling, drugs, precious metal, trade and real estate. This fact has further limited the effectiveness of
monetary policy.
Capital Market
❖ “Capital Market is a place where buyers and sellers can interact and transact financial securities like
shares, debentures, debt instruments, bonds, derivative instruments like the futures, options, swaps,
ETFs.”
❖ “Capital market is a market for long term debt and equity shares.”

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❖ “It is a market that provides medium term and long term finance to the organizations for satisfying fixed
capital requirement of business.”
From the above definition it is clear that Capital Market is the market for borrowing and lending long term
capital required by business enterprises. This finance use for satisfying fixed capital requirement of the
business organization. Capital market includes equity as well as debt securities. The securities face value is low
but maturity period is very long compare to money market. It is regulated and controlled by various Acts and
SEBI, so it is fully organized market.
Features
1. Link between Investors and borrowers: Capital Market acts as an intermediary or link between investors
(lenders) and borrowers of funds. It makes possible the transfer of money from the investors to the
entrepreneurial borrowers. It facilitates the transfer of real economic resources from lenders to ultimate
users.
2. Period: The period of capital market securities is medium term and long term. These securities provide up
to 5 years, 10 years, 20 years, and 30 years or even up to winding up of the business. Corporates, industrial
organizations, financial institutions access long term funds from both domestic and foreign market. It
doesn’t deal with short term financial instruments like Commercial Papers, Certificate of Deposit, Banker
Acceptance etc.
3. Presence of Intermediaries: Capital Market operates with the help of intermediaries like brokers,
underwriters, merchant bankers, sub-brokers, collection bankers and so on. The investors and borrowers
cannot make transactions without intermediaries. So they act as working organs of capital market and are
very important elements of capital market.
4. Promotes Capital Formation: Capital Formation is the net addition to the existing stock of an economy’s
capital. The activities of capital market determine the rate of capital formation in an economy. Capital
market offers attractive opportunities to those who have surplus funds so that they invest more and more
in capital market and are encouraged to save more for profitable opportunities.
5. Fully Organized Market: Capital Market is operates freely. But government frames various rules,
regulations and policies for regulating and controlling transactions of capital market. Government also
established authorities for the regulation, recording and controlling of all transactions of the capital
market securities such as ROC, SEBI, Depositories, and Stock Exchanges.
6. Marketable and Non-marketable Securities: Capital Market trades in both marketable and non-
marketable securities. Marketable securities are securities that can be transferred to another e.g. Equity
Shares, Preference Shares, Debentures, bonds etc. On the other hand, non-marketable securities are those
which cannot be transferred to another e.g. Term Deposits, long term loans and advances.
7. Variety of Investors: Capital market has a wide variety of investors. It comprises both individuals like
general public and institutional investors like mutual funds, insurance companies, financial institution, etc.
It also has foreign investors, both Individuals and Institutions, and Non-Resident Indians can also invest in
the Indian securities market (GDR and ADR).
8. Risk: Capital market securities have long term maturity periods and provide higher return on investment,
so risk is very high compare to money market.

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Instruments
1. Equity Shares: Those shares do not have any preference regarding payment of dividend and repayment of
capital at the time of winding up company is known as Equity shares. It is considered owned capital. They
get part of profit in form of dividend on their investment. The rate of dividend is fluctuating. It is repaid on
dissolution of business. Equity shareholders bear the risk of business. They enjoy management and voting
rights, so they are considered real owner of the company.
2. Preference Shares: Those shares enjoy preference regarding payment of dividend and repayment of
capital at the time of winding up company is known as Preference shares. It is also considered owned
capital. They get part of profit in form of dividend on their investment. The rate of dividend is fixed. It is
repaid after specific time period (Normal Company – 20 years and Infrastructure Development Company –
more than 30 years). Preference shareholders do not bear the risk of business. They not enjoy
management and voting rights, so they are considered co-owner of the company.
3. Debentures: “Debenture” includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company or not. Debentures provide
borrowed capital. They get interest as return on their investment. The rate of interest is fixed. It is repaid
after specific time period (Normal Company – 10 years and Infrastructure Development Company – 30
years). Debenture holders do not bear the risk of business. They not enjoy management and voting rights,
so they are considered creditor of the company.
4. Bonds: A bond is an interest bearing certificate issued by a government or business firm, promising to pay
the holder a specific sum at a specified date. Bonds provide borrowed capital. They get interest as return
on their investment. The rate of interest is fixed. It is repaid after specific time period but more than
debentures period. Bond holders do not bear the risk of business. They not enjoy management and voting
rights, so they are considered creditor of the company.
5. Government Securities: When equity shares, preference shares, debentures, bonds or any other securities
issued by Central Govt., State Govt., Local Bodies, Statutory Corporations and Govt. Company for collecting
long term capital, these are known as Government Securities. The investors get status and return as per
nature of securities.
6. Public Deposits: “Deposit” includes any receipt of money by way of deposit or loan or in any other form by
a company, but does not include such categories of amount as may be prescribed in consultation with the
Reserve Bank of India. Deposits provide borrowed capital. They get interest as return on their investment.
The rate of interest is fixed. A company can invite public deposits for a period of six months to three years.
Public deposits are primarily a source of short-term finance. However, the deposits can be renewed from
time-to-time. Renewal facility enables companies to use public deposits as medium-term or long-term
finance. Depositors do not bear the risk of business. They not enjoy management and voting rights, so they
are considered creditor of the company.
Classification of Capital Market
1. Government Securities Market: In this market Central Govt., State Govt., Local Bodies, Statutory
Corporations and Govt. Companies issue the securities for collecting medium term and long term capital.
Government uses this finance for the public expenditure or for providing facilities to the citizens of the
nation. Government Securities includes the equity shares, preference shares, debentures, bonds. These

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securities are guaranteed by the government regarding principal amount and return on investment. These
are highly liquid, because RBI and financial institutions are always ready to purchase government securities
from public. The market value of these securities does not found major changes, so these securities do not
speculate. In this market generally institutional investors invest money, so volume of transactions is very
large. Due to these characteristics Government Securities Market is considered as a Gilt-edged Market.
2. Long Term Loan Market: Banking and Non-Banking Financial Institutions provide the medium term and
long term loans to the business sectors. Companies utilize the loans for establishment, expansion and
modernization of business. The financial institutions provide direct and indirect finance for industrial
development. Companies obtain loan in the form of term loan, mortgage loan, financial guarantee (letter
of credit), etc.
3. Industrial Securities Market: In this industrial financial instruments are traded by new company or existing
company. Industries raise finance for satisfying their fixed capital requirements.in this market trading
between Company and investor or investor and investors. This market is further divided into Primary and
Secondary market.
A) Primary Market
This is the market for new securities. In primary market companies issues shares, debentures and
bonds directly to investors and collect funds for the purpose of establishing new business or for expanding and
modernizing the existing business. Here buyers get new securities, so it is also called new issue market. The
activities of primary markets are assisted by the underwriters, share brokers, stock exchanges, merchant
bankers etc. The primary market facilitates capital formation in the economy by channelizing public savings
into productive investments.
Methods of Raising Funds in the Primary Market
1) Public Issue through Prospectus: This is the most popular method of raising funds by public Limited
companies in the primary market. Under this method, the company invites the general public to subscribe
its shares or debentures through issue of ‘Prospectus’, which makes a direct appeal to investors to invest
in the company, through an advertisement in the newspapers and magazines. The prospectus contains
everything about the company and public issue. These details help the public to understand and evaluate
the earnings potential and risk in the proposed investment. This method requires require advertisement
and assistance of brokers, bankers, underwriters etc. It is an expensive method.
a) Initial Public Offer: It refers to the process of offering shares of a company to the public for the first
time. In the IPO, company invite general public to subscribe (purchase) the securities of the
organization. Company makes IPO through fixed price issue or Book building process.
b) Further/ Follow-on Public Offer: When a company issues shares to the public after an IPO, it is
known as Further Public Offer or Follow on Public Offer.
2) Offer of Sale: It is an indirect method of selling securities to the public. Under this method the entire lots
of securities are first sold to an intermediary at a fixed price. The intermediary may be issuing houses or
stock brokers. The intermediary then resells these shares to the investing public at a higher price. The
difference between purchase price and selling price is the profit (turn) of the intermediary. The issuing
company thus saved from the tedious process involved in making public issue.

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3) Private Placement: It refers to the process of inviting subscription to the securities of a corporate issuer by
means other than public offering. Private placement is the allotment of securities by a company to
institutional investors like LIC, UTI etc. and some selected individuals. This method helps to raise capital
more quickly than a public issue through prospectus. For this issue does not require 'underwriting'. This
method is less expensive and less time consuming.
4) Right Issue: This is the offer of new shares by a company to the existing shareholders. When an existing
company needs fresh capital and issues new shares, each existing shareholder has the right to subscribe to
the new shares in the proportion of shares he already holds. 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.
It is chance to existing shareholders to purchase additional new shares or debentures in the company at a
discounted rate. This right is called the ‘pre-emptive right’ of the existing shareholders. It is only a right;
there is no obligation to exercise this right.
5) E-IPO: It is the new method to issue securities. E-IPO refers to issuing securities through on-line system of
stock exchange. For the E-IPO company has to enter into an agreement with stock exchange and has to
appoint SEBI registered brokers have to be appointed for the purpose of accepting applications and placing
orders with the company. The issuing company should also appoint a registrar to the issue. The securities
have to be listed on at least one stock exchange, other than the exchange through which it has offered for
its securities. The lead manager coordinates with all the intermediaries connected with the issue.
B) Secondary Market
It is a market for second-hand securities. It is also known as Stock Exchange or Share Market.
Secondary market is the market for purchase and sale of existing or listed securities. It is a market in which
shares, debentures, bonds etc. which have already been issued by companies/Govt. are traded. It consists of
buyers and sellers of securities, brokers, stock exchange etc. It is a platform for investor to sale their securities
to another person and converts their securities into cash. Secondary market provides liquidity to existing
securities and thereby indirectly promotes capital formation. Securities are cleared and settled within the
regulatory framework of SEBI. In the stock market prices are determined by demand and supply of the
securities.
Other Types of Financial Market
❖ Commodity Market: It is an exchange or market place where different commodities are traded. It is a
place where in a wide range of products such as precious metals, crude oil, coffee, pulses etc. are traded.
Market in which commodities are bought and sold between producers, traders, exporters and consumers.
It is regulated by SEBI. Exchange has no role in pricing of contracts. Buyers and sellers determine the price.
There are six major commodity trading exchanges in India such as Multi Commodity Exchange (MCX),
National Commodity and Derivatives Exchange (NCDEX), National Multi Commodity Exchange (NMCE),
Indian Commodity Exchange (ICEX), Ace Derivatives Exchange (ACE) and The Universal Commodity
Exchange (UCX)
❖ Derivatives Market: Derivatives are financial contracts whose value is dependent on an underlying asset or
group of assets. The commonly used assets are stocks, bonds, currencies, commodities and market indices.
The value of the underlying assets keeps changing according to market conditions. The basic principle
behind entering into derivative contracts is to earn profits by speculating on the value of the underlying

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asset in future. Derivatives Market refers to the financial market for financial instruments such as
underlying assets and financial derivatives. There are four kinds of participants in a derivatives market:
hedgers, speculators, arbitrageurs, and margin traders. There are four major types of derivative contracts:
options, futures, forwards, and swaps. Derivatives market in India began in 2000 when NSE and BSE
commenced trading in equity derivatives.
❖ Foreign Exchange Market: The foreign exchange market or the ‘forex market’ is a system which
establishes an international network allowing the buyers and sellers to carry out trade or exchange of
currencies of different countries. It can be stated as one of the most liquid financial markets which
facilitate ‘over-the-counter’ exchange of currencies. In this market foreign currencies are traded i.e.
foreign currencies are bought with domestic currencies and foreign currencies are sold for domestic
currencies.