Financial market

Financial Market
Madan Kumar M.A.,M.A.,B.Ed.,M.Phil.,M.B.A.,

Concept
 Financial market and banks help the savers and the
investors by mobilizing funds between them,
 Financial market and banks act as intermediaries in
this allocative function of matching the demand and
supply of funds.
Household
(savers)
Banks or financial markets
(allocative function )
Business firm
(investors)

 If the allocative function of directing funds available
for investment into most productive investment
opportunity is performed well, it leads to
1. Higher rate of return to households
2. Scare resources are allocated to those firms, which
have the highest productivity.

 Financial market is a market for creation and
exchange of financial assets.
1. Creation of financial assets
2. Exchange of assets
3. Financial assets
Financial Market

1. Mobilization of savings and channelizing them into
the most productive uses.
2. Facilitating price discovery
3. Providing liquidity to financial assets
4. Reducing the cost of transactions
Function of financial market

Financial markets
Money market capital market
(market for short-term instruments) (market for long-term instruments)
Money market instruments primary market secondary market
1. Treasury bills (new issue market) (sale and purchase of existing securities )
2. Commercial papers
3. Call money
4. Certificate of deposit debt and equity
5. Commercial bill
Types of financial market

 Short – term funds
 Period of maturity is up to one year
 Low risk, unsecured
 Debts are highly liquid
 Issued and actively traded everyday, over the
telephone and through the internet
Money Market

1. Treasury bills ( T-Bills)
It is a short term borrowing instrument issued by the
Government of India, RBI, issues it on behalf of GOI
1. It is also known as zero coupon bonds
2. It has a maturity of less than one year
3. It is issued at discount and repaid at par
4. It is in the form of a promissory note
5. It is highly liquid and have negligible risk
6. It is available in denominations of 25000 and its multiples.
Money market instruments

2. Commercial paper
Issued by large creditworthy companies to raise short-term
funds at lower rates of interest than the market rate
1. It is unsecured promissory note, having a maturity of 15
days to one year
2. It is negotiable instrument, transferable by endorsement
and delivery
3. It is sold at discount and redeemed at par
4. It is an alternative to bank borrowing
5. It is used by companies for bridge financing

3. Call money
Call money is a method used by commercial banks, to borrow
funds from each other, in order to maintain the Cash Reserve
Ratio (CRR)
1. It is short-term finance repayable on demand
2. Maturity of call money is 1 day to 15 days
3. The interest paid on call money is called the call rate
4. Call rate is highly fluctuating, which vary from day-to-day
or even from hour-to-hour
5. There is an inverse relationship between call rates and
return on other short-term money markets instruments.

4. Certificate of Deposit
Certificate of deposits are issued by commercial banks or
developmental financial institutions to individuals,
institutions, corporations and companies
1. It is an unsecured, negotiable instrument in bearer form
2. It is issued in periods of tight liquidity, when the deposits
by individual and households is less, but the demand for
credit is high.
3. They help to mobilize large amount of money in a short
time period

5.Commerical Bills
It is bill of exchange used by business firms to meet their working
capital needs
1. It is a short-term, self-liquidating, negotiable instrument, used
for financing credit sales of a firm
2. When goods are sold on credit, the seller draws a bill of
exchange on the buyer, who accepts it. When he accepts the
bill, it becomes a marketable instrument, which is called a
trade bill. When the seller presents it to the bank for
discounting it, to get the funds before the maturity of the bill
and the bank accepts it, it is called a commercial bill

 Capital market is a market for medium and long –
term funds.
 This market facilitates the institutional arrangements
through which long-term funds, both debt and equity
are raised and invested.
 The capital market consists of development banks,
commercial banks and stock exchange.
Capital market

 Primary market
It is also known as the new issues market , as this
markets deals with the new securities issued for the
first time
Types of capital market

1. Offer through prospectus
A company invites public to subscribe for tis shares
through issue of prospectus.
1. The contents of prospectus must be according to
the provisions of Companies Act and SEBI guidelines
2. The issue must be listed on at least one stock
exchange
3. The issue may be underwritten to save the company
from under subscription
Methods of floatation of new issues
in primary market

2. Offer for sale
Under this method, securities are not issued directly to
the public, but are offered for sale through
intermediaries like issuing houses or stock brokers.
For this, the company sells the securities enbloc to
brokers at an agreed price, who, then resells them to
the investing public.
in primary market

3. Private placement
It is the allotment of securities by a company to
institutional investors and some selected individuals.
1. It helps to raise funds more quickly than a public
issue
2. The cost of floatation, which is quite expensive in
other alternatives, is saved
in primary market

4. 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. This right is called the pre-emptive
right’ of the existing shareholders.
in primary market

5. e-IPOs
When the public issue is made through an online system of stock
exchange, it is known as e-IPO, i.e., electronic Initial Public Offer.
1. The company doing so, has to enter into an agreement with
the stock exchange and has to appoint a SEBI registered
broker to accept applications and place orders with the
company
2. Appoint a registrar having electronic connectivity with the
exchange
3. Securities have to be listed on at least one exchange,
4. The lead manager coordinates with all the intermediaries
connected with the issue.
in primary market

 Secondary market / stock exchange
Secondary markets is also known as the stock markets
or stock exchange.
In this market, securities are not directly issued by the
company to investors but it is sold by existing investors
to other investors.
It provides liquidity and marketability to existing
securities.
Types of capital market

Stock Exchange –
functions and
trading procedure

 The stock exchange plays a pivotal role in the growth of
the industry and commerce of the economy that
eventually affects the economy to a great extent
 The primary market is for new issues of shares, debentures
etc., of already listed companies of for the companies,
which are going public for the first time .
 Thus , stock exchange is a common platform where buyers
and sellers of securities actively trade already issued
securities
Introduction

 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 of securities.
Definition

1. Provides liquidity and marketability to existing
securities.
2. Pricing of securities
3. Safety of transactions
4. Contributes to economic growth
5. Spreading equity cult
6. Provides scope for speculation
Functions

 Selection of a broker
 Opening demat-account with depository
 Placing the order
 Executing the order
 Settlement
Trading procedures on a stock
exchange

 The depository act was passed in 1996
 It was formed for the purpose of ensuring free
transferability of securities with speed, accuracy and
security.
 SEBI developed a new system , by which all trading in
shares is done in electronic form.
 Depository services and demat account are the very
basis of this system
Depository

 Depository is an institution or organization which
holds securities in electronic form, in which trading is
done.
 It is technology driven electronic storage system
 It has no paper work relating to share certificate,
transfer, forms etc.,
 In India there are two depository
1. National Securities Depositories Limited (NSDL)
2. Cantal Depository Services Limited (CDSL)
Depository

1. Depository participant (DP)
2. Beneficial owner
3. Issues
Terms related to Depository

 Dematerialisation is the process, by which the
physical form of securities are converted into
electronic form
 When shares are converted into electronic form, they
are held in a demat account
Dematerialisation of securities

1. A demat account is opened with a depository. For this he
approaches a depository participant, where he fills in a demat
form and submits the required documents.
2. Then, he submits his certificates to the DP, along with the form
and documents.
3. The registrar, then confirms the request and dematerialise his
account with the shares submitted by him
4. The account thus is credited with the number and amount of
shares
5. Now, the investor can, with the help of broker and DP,
operates his account by selling or buying shares and other
securities .
Procedure for Dematerialisation

1. Brokers
2. Jobbers
3. Bulls
4. Bears
5. Stag
Types of operators on a stock
exchange

Financial market

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