FINACIAL MARKET

1.Meaning of Financial Markets:-

A Financial Market is referred to space, where selling and

buying of financial assets and securities take place. It allocates
limited resources in the nation’s economy. It serves as an agent
between the investors and collector by mobilising capital
between them.
In a financial market, the stock market allows investors to
purchase and trade publicly companies share. The issue of new
stocks are first offered in the primary stock market, and stock
securities trading happens in the secondary market.
Such a market is also referred to as Wall Street, which proves
to be healthy for the proper working of the capitalist economies
across the globe.
1.2Types of Financial Markets
There are so many financial markets, and every country is home
to at least one, although they vary in size. Some are small while
some others are internationally known, such as the New York
Stock Exchange (NYSE) that trades trillions of dollars on a
daily basis. Here are some types of financial markets.

1. Stock market
The stock market trades shares of ownership of public
companies. Each share comes with a price, and investors make
money with the stocks when they perform well in the market.
It is easy to buy stocks. The real challenge is in choosing the
right stocks that will earn money for the investor.
There are various indices that investors can use to monitor how
the stock market is doing, such as the Dow Jones Industrial
Average (DJIA) and the S&P 500. When stocks are bought at
a cheaper price and are sold at a higher price, the investor earns
from the sale.

2. Bond market
The bond market offers opportunities for companies and the
government to secure money to finance a project or investment.
In a bond market, investors buy bonds from a company, and the
company returns the amount of the bonds within an agreed
period, plus interest.

3. Commodities market
The commodities market is where traders and investors buy and
sell natural resources or commodities such as corn, oil, meat,
and gold. A specific market is created for such resources
because their price is unpredictable. There is a commodities
futures market wherein the price of items that are to be
delivered at a given future time is already identified and sealed
today.

4. Derivatives market
Such a market involves derivatives or contracts whose value is
based on the market value of the asset being traded. The futures
mentioned above in the commodities market is an example of
a derivative.
5. Over-the-Counter Markets

An over-the-counter (OTC) market is a decentralized market—

meaning it does not have physical locations, and trading is
conducted electronically—in which market participants trade
securities directly between two parties without a broker. While
OTC markets may handle trading in certain stocks (e.g., smaller
or riskier companies that do not meet the listing criteria of
exchanges), most stock trading is done via exchanges.

6. Derivatives Markets

A derivative is a contract between two or more parties whose

value is based on an agreed-upon underlying financial asset
(like a security) or set of assets (like an index). Derivatives are
secondary securities whose value is solely derived from the
value of the primary security that they are linked to. In and of
itself a derivative is worthless.

7. Forex Market

The forex (foreign exchange) market is the market in which

participants can buy, sell, hedge, and speculate on the exchange
rates between currency pairs. The forex market is the most
liquid market in the world, as cash is the most liquid of assets.
The currency market handles more than $7.5 trillion in daily
transactio.
1.3Functions of Financial Markets
1. Price Determination
2. Funds Mobilization
3. Liquidity
4. Risk sharing
5. Easy Access
6. Reduction in transaction costs and provision of the
Information
7. Capital Formation

1 – Price Determination
The financial market performs the function of price discovery
of the different financial instruments traded between the buyers
and the sellers on the financial market. The prices at which the
financial instruments trade in the financial market are
determined by the market forces, i.e., demand and supply. So
the financial market provides the vehicle by which the prices
are set for both financial assets which are issued newly and for
the existing stock of the financial assets.

2 – Funds Mobilization
Along with determining the prices at which the financial
instruments trade in the financial market, the required return
out of the funds invested by the investor is also determined by
participants in the financial market. The motivation for persons
seeking the funds is dependent on the required rate of return,
which the investors demand.
Because of this function of the financial market only, it is
signaled that funds available from the lenders or the investors
of the funds will get allocated among the persons who need the
funds or raise funds through the means of issuing financial
instruments in the financial market. So, the financial market
helps in the mobilization of the investors’ savings.

3 – Liquidity
The liquidity function of the financial market provides an
opportunity for the investors to sell their financial

instruments at their fair value prevailing in the market at any

time during the working hours of the market. In case there is
no liquidity function of the financial market. The investor
forcefully have to hold the financial securities or the
financial instrument until the conditions arise in the market
to sell those assets or the issuer of the security is obligated
contractually to pay for the same, i.e., at the time of maturity in debt
instrument or at the time of the liquidation of the company in case
of the equity instrument is until the company is either voluntarily
or involuntarily liquidated.
Thus, investors can sell their securities readily and convert
them into cash in the financial market, thereby providing
liquidity.

4 – Risk sharing
The financial market performs the function of risk-sharing as
the person who is undertaking the investments is different from
the persons who are investing their fund in those investments.
With the help of the financial market, the risk is transferred
from the person who undertakes the investments to those who
provide the funds for making those investments.

5 – Easy Access
The industries require the investors to raise funds, and the
investors require the industries to invest their money and earn
the returns from them. So the financial market platform
provides the potential buyer and seller easily, which helps them
save their time and money in finding the potential buyer and
seller.
6 – Reduction in Transaction Costs and Provision of
the Information
The trader requires various types of information while doing
the transaction of buying and selling the securities. For
obtaining the same time and money is required.
But the financial market helps provide every type of
information to the traders without the requirement of spending
any money by them. In this way, the financial market reduces
the cost of the transactions.

7 – Capital Formation
Financial markets provide the channel through which the new
investors’ savings flow in the country, which aids in the
country’s capital formation.
2. Financial market consists of two major
segments:-

(a) Money Market

(b) Capital Market

2.1 MONEY MARKET:-

The money market is a good place for individuals, banks, other
companies, and governments to park cash for a short period of
time, usually one year or less. It exists so that businesses and
governments that need cash to operate can get it quickly at a
reasonable cost, and so that businesses that have more cash than
they need can put it to use.
The returns are modest but the risks are low. The instruments
used in the money markets include deposits, collateral loans,
acceptances, and bills of exchange
The Money Market Instruments help to provide short-term
funds to the private and public institutions who need finance
for their working capital requirements. These funds are
provided by discounting the trade bills through commercial
banks, brokers, discount houses, and acceptance houses.
Therefore, the money market instruments, in turn, can help the
2.2 Functions of Money
Market

1. Provides Funds
The Money Market Instruments help to provide short-term
funds to the private and public institutions who need finance
for their working capital requirements. These funds are
provided by discounting the trade bills through commercial
banks, brokers, discount houses, and acceptance houses.
Therefore, the money market instruments, in turn, can help the
development of trade, industry and commerce within and
outside the country.
1. Use of Surplus Funds
Money market instruments provide opportunity to the banks
and financial institutions to use their surplus funds profitably
for a small period of time. They include commercial banks as
well as large non-financial corporations, states and other local
governments.

3. No need to borrow from banks

In case of a developed money market, there is no need to
borrow money from commercial and central bank. However, if
there is a short of cash requirement, they can call in some of
their loans from the money market. Also, the most of the
commercial banks would rather prefer to recall their loans than
recalling it from the central banks at a higher rate of interest.

4. Helps Government
The money market instruments prove helpful to the government
in borrowing short-term funds on the basis of treasury bills at
low interest rates. Besides, it would lead to inflationary
pressures in the economy if the Government had to issue paper
money or borrow from the central bank.

5.Helps in Monetary Policy

The existence of a well-developed money market will help in
successfully implementing the monetary policies of central
bank. Is only through money market the central banks can
control the banking system and therefore Influence commerce
and the industry.
2.3 Types of Money Market
Instruments in India

In this section we shall see the different types of money

market instruments in India as listed above:

1. Treasury Bills
o Treasury bills or TBs are known to be one of the safest
money market instruments that are available. They are
issued by the central government. o Treasury bills carry
 low or no risks, hence their returns are not attractive.
However, they come with different maturity tenures like
3 months, 6 months, 1 year.
o They are also circulated by the primary and secondary

markets. o The interest earned by the buyer is the difference

between the maturity value of the instrument and the
buying price of the bill, which is decided with the help of
biddings done through auctions.
Also, read more about Prompt Corrective Actions, here.

2. Commercial Papers
o Commercial papers work more like the bill of exchange. o
They are specifically issued by businesses to meet their
short-term money requirements. o The commercial papers
provide greater liquidity due to easy transfer from one
individual to another in case of immediate requirement of
cash. o They usually have a validity of 7 days to one year from
the date of issue. o They are issued at a discount, with the
difference between the face value and their price, bringing
profits to the investor.

3. Certificate of Deposits o The Certificate of

Deposits or CDs are a negotiable instrument referred
to as term deposits. They are accepted by the
commercial banks.
o They are usually issued through a promissory note.
 o The CDs can be issued to trusts, person(s), corporations,
etc. Besides, they can be issued by scheduled commercial
banks at a discount as well. o The duration of the certificate
of deposits varies between 1 year to 3 months. However,
when they are issued by a financial institution, the
certificate of deposits are valid from 1 year to 3 years.
Learn more about Foreign Trade in India, here.
3 CAPITAL MARKET

Capital markets are where savings and investments are

channeled between suppliers and those in need. Suppliers are
people or institutions with capital to lend or invest and typically
include banks and investors. Those who seek capital in this
market are businesses, governments, and individuals. Capital
markets are composed of primary and secondary markets. The
most common capital markets are the stock market and the
bond market. They seek to improve transactional efficiencies
by bringing suppliers together with those seeking capital and
providing a place where they can exchange securities.
Transactions on capital markets are generally managed by
entities within the financial sector or the treasury departments
of governments and corporations, but some can be accessed
directly by the public. As an example, in the United States, any
American citizen with an internet connection can create an
account with TreasuryDirect and use it to buy bonds in the
primary market, though sales to individuals form only a tiny
fraction of the total volume of bonds sold. Various private
companies provide browserbased platforms that allow
individuals to buy shares and sometimes even bonds in the
secondary markets. There are many thousands of such systems,
most serving only small parts of the overall capital markets.
Entities hosting the systems include stock exchanges,
investment banks, and government departments. Physically,
the systems are hosted all over the world, though they tend to
be concentrated in financial centres like London, New York,
and Hong Kong.
3.1 Types of Capital Market:
Capital markets are composed of the suppliers and users of
funds. Suppliers include households (through the savings
accounts they hold with banks) as well as institutions like
pension and retirement funds, life insurance companies,
charitable foundations, and non-financial companies that
generate excess cash. The users of the funds distributed on
capital markets include home and motor vehicle purchasers,
non-financial companies, and governments financing
infrastructure investment and operating expenses.
4 Primary Market
The primary market mainly deals with new securities that are
issued in the stock market for the first time. Thus it is also
known as the new issue market. The main function of the
primary market is to facilitate the transfer of the newly issued
shared from the companies to the public. The main investors in
this type of market are financial institutions, banks, HNIs, etc.
The primary market is where securities are created. It's in this
market that firms sell (float) new stocks and bonds to the public
for the first time. An initial public offering, or IPO, is an
example of a primary market. These trades provide an
opportunity for investors to buy securities from the bank that
did the initial underwriting for a particular stock. An IPO
occurs when a private company issues stock to the public for
the first time.
For example, company ABCWXYZ Inc. hires
five underwriting firms to determine the financial details of its
IPO. The underwriters detail that the issue price of the stock
will be $15. Investors can then buy the IPO at this price directly
from the issuing company.
This is the first opportunity that investors have to contribute
capital to a company through the purchase of its stock. A
company's equity capital is comprised of the funds generated
by the sale of stock on the primary market.
4.1 Types of Primary Market
Issuance
After the issuance of securities, investors can purchase such
securities in various ways. There are 5 types of primary market
issues.
 • Public Issue
Public issue is the most common method of issuing securities
of a company to the public at large. It is mainly done via Initial
Public Offering (IPO) resulting in companies raising funds
from the capital market. These securities are listed in the stock
exchanges for trading.

A privately held company converts into a publicly-traded

company when its shares are offered to the public initially
through IPO. Such a public offer allows a company to raise
funds for expansion of business, improving infrastructure, and
repaying its debts, among others.
Trading in an open market also increases a company’s liquidity
and provides a scope for issuance of more shares in raising
further capital for business.

The Securities and Exchange Board of India is the regulatory

body that monitors IPO. As per its guidelines, a requisite due
enquiry is conducted for a company’s authenticity, and the
company is required to mention its necessary details in the
prospectus for a public issue.

• Private Placement
When a company offers its securities to a small group of
investors, it is called private placement. Such securities may be
bonds, stocks or other securities, and the investors can be both
individual and institutional.
Private placements are easier to issue than initial public
offerings as the regulatory stipulations are significantly less. It
also incurs reduced cost and time, and the company can remain
private.

Such issuance is suitable for start-ups or companies which are

in their early stages. The company may place this issuance to
an investment bank or a hedge fund or place before ultra-high
net worth individuals (HNIs) to raise capital.

• Preferential Issue
A preferential issue is one of the quickest methods available to
companies for raising capital. Both listed and unlisted
companies can issue shares or convertible securities to a select
group of investors. However, the preferential issue is neither a
public issue nor a rights issue.

The shareholders in possession of preference shares stand to

receive the dividend before the ordinary shareholders are paid.

• Qualified Institutional Placement

Qualified institutional placement is another kind of private
placement where a listed company issues securities in the form
of equity shares or partly or wholly convertible debentures
apart from such warrants convertible to equity shares and
purchased by a Qualified Institutional Buyer (QIB).

QIBs are primarily such investors who have the requisite financial
knowledge and expertise to invest in the capital market.
5 Secondary Market
It is the market where the trading of the securities actually takes
place, thus it is also referred to as the stock market. Here the
buying and selling of securities take place, The existing
investors sell the securities and new investors by the securities.

“The stock market is the story of cycles and of the human

behavior that is responsible for overreactions in both
directions.”- Seth Klarman.

For buying equities, the secondary market is commonly

referred to as the "stock market." This includes the New York
Stock Exchange (NYSE), Nasdaq, and all major exchanges
around the world. The defining characteristic of the secondary
market is that investors trade among themselves.
That is, in the secondary market, investors trade previously
issued securities without the issuing companies' involvement.
For example, if you go to buy Amazon (AMZN) stock, you are
dealing only with another investor who owns shares in
Amazon. Amazon is not directly involved with the transaction.
In the debt markets, while a bond is guaranteed to pay its owner
the full par value at maturity, this date is often many years down
the road. Instead, bondholders can sell bonds on the secondary
market for a tidy profit if interest rates have decreased since the
issuance of their bond, making it more valuable to other
investors due to its relatively higher coupon rate.

5.1 Types of Secondary Market

Secondary markets are primarily of two types – Stock
exchanges and over-the-counter markets.

• Stock exchange
Stock exchanges are centralised platforms where securities
trading take place, sans any contact between the buyer and the
seller. National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE) are examples of such platforms.

Transactions in stock exchanges are subjected to stringent

regulations in securities trading. A stock exchange itself acts as
a guarantor, and the counterparty risk is almost nonexistent.
Such a safety net is obtained via a higher transaction cost being
levied on investments in the form of commission and exchange
fees.

• Over-the-counter (OTC) market

Over-the-counter markets are decentralised, comprising
participants engaging in trading among themselves. OTC
markets retain higher counterparty risks in the absence of
regulatory oversight, with the parties directly dealing with each
other. Foreign exchange market (FOREX) is an example of an
over-the-counter market.

In an OTC market, there exists tremendous competition in

acquiring higher volume. Due to this factor, the securities’
price differs from one seller to another.

3.2Difference between Capital

Market and Money Market
ruc
5.2 Conclusion
Capital markets are markets that help in the channelling of
savings and investments. This takes place between suppliers
and needy parties. Suppliers include parties like individuals or
financial institutions like banks. Those who need capital are
individuals, entrepreneurs, business organizations, and
governments. Capital markets are of two types- primary and
secondary markets. The primary market deals with new
securities that are issued in the stock market. Secondary
markets involve the trading of securities. There is a difference
between capital market and money market. The money
market involves short term borrowing and lending. On the
other hand, dealing with long-term assets takes place in the
capital market.

Conclusion Capital markets are markets that help in the

channelling of savings and investments. This takes place
between suppliers and needy parties. Suppliers include parties
like individuals or financial institutions like banks.
Those who need capital are individuals, entrepreneurs,
business organizations, and governments.

INDEX
SR. NO. CONTENT PAGE
NO.
1. Financial market.
1.1 meaning
1.2 Types of financial market.
1.3 Function of financial market

2 Financial market two major segment

2.1 Money market
2.2 Function of money market
2.3 Types of money market
instrument in india

3 Capital market
3.1 Feature of Indian capital market
3.2 Difference between capital
market and money market

4 Primary market
4.1 Types of primary market issuance
5 Secondary market
5.1 Types of secondary market