Law of Corporate

Finance
Introduction to Financial Markets
• Financial Market is a marketplace, where the creation and the trading of the

financial assets take place.

• Financial assets include shares, bonds, derivatives, commodities, currencies,

etc.

• The financial market of any country plays a crucial role in the allocation of the

limited resources available in the economy of any country.

• Some of the financial markets are very small with the little amount of the

activity, while some of the financial markets trade trillions of amounts of

securities daily.

• It acts as an intermediary between savers and the investors by mobilizing the

funds between them.

• So, the financial market gives a platform to buyers and the sellers, to meet in

order to trade in the assets at the price which is determined by the market

forces i.e., demand and supply in the market.

Types of the Financial Markets
There are different types of financial markets which are as follows:

✓ Money Markets

• A money market is basically for short-term financial assets that can be

turned over rapidly at a minimum cost. These instruments are quickly

convertible into money with the least transaction costs.

• The operations in the money market are for a duration that can be

extended up to one year and it deals in short term financial assets.

• This market is an institutional source of working capital for the

companies.

• The participants of this market are commercial banks, RBI, large

corporate, etc. the instruments in the money market are commercial

bills, commercial paper, certificates of deposit, treasury bills, etc.

✓ Over-the-Counter Markets

• This market is a decentralized market not having a centralized physical

location.

• It is basically the secondary market. Here, the participants of the market

trade with each other by using different modes of communication like

electronic mode, telephone, etc. Companies that are traded in the OTC

market are small companies.

 • This market has less transparency, fewer regulations and is inexpensive.

✓ Derivatives Market

• The derivatives market is the financial market that trades in the

securities that derive its value from some specified underlying asset.

• Derivatives do not have a physical existence but emerge out of the

contracts between two parties.

• These underlying assets may be debentures, shares, currencies, etc.

 • The derivative contracts’ value is determined by the market price of an

underlying item.

• This market trades in the derivatives which include futures and forward

contracts, swaps, options, etc.

✓ Bonds Market

• The bond is the debt security where an investor loans the money for a

specific time period and at definite coupon rate i.e. interest rate.
 • These bonds include Corporate Bonds and municipal bonds.

✓ Forex Market

• The forex market is not a physical entity but is a network of

communication among banks, brokers and forex dealers.

• This is the market where all kinds of currencies are traded. It is the

highest liquid market as cash is liquid.

• It includes market dealings like spot market, forward market, etc.

Advantages and Disadvantages
Advantages

• It gives a platform to buyers and the sellers to meet in order to trade in the

assets.

• The prices for trading which are determined by the market forces i.e.,

demand and supply in the market helps in the determination of the prices

of securities.
• It helps in the mobilization of the savings of the investors as the investor can

put his money in most productive uses.

• For the traders, the financial market platform provides the potential buyer

and seller of their securities, which help them in saving their time and

money in finding the potential buyer and seller.

• In the financial market, investors can sell their securities readily and convert

them into cash, thereby providing liquidity to the tradable assets.

Disadvantages

• Prices in the financial market may not indicate stock’s true intrinsic value

because of some macroeconomic forces like the taxes etc.

• There are certain factors that change the prices of the securities suddenly.

So there is a risk involved when trading in the financial market. Like if any

negative news about the company comes then its price may decrease to a

great extent causing loss to the person holding its shares.

Important Points of the Financial Markets
• It is the market, an arrangement or institution which facilitates the exchange

of the financial instruments and the financial securities.

• It may have or not have a physical location. The assets can be exchanged

between the parties over the phone or the internet as well.

• Some of financial markets are very small with little amount of activity, while

some of the financial markets trade trillions of amounts of securities daily.

Conclusion

• Thus it can be concluded that the Financial Markets is the market where the

traders are involved in the buying and selling of the financial assets like

shares, bonds, derivatives, commodities, currencies, etc.

• It is an arrangement or institution which facilitates the exchange of the

financial instruments and the financial securities. It may have or not have a

physical location.
• The assets can be exchanged between the parties over the phone or the

internet as well.

• From the last few years, the role of the financial market has seen a drastic

change, because of a number of factors such as low transaction cost,

investor protection, high liquidity, pricing information transparency, legal

procedures easiness for the settling of disputes, etc.

THANKS