Financial Market

Financial system

Financial institutions Financial markets

Financial
Financial services
instrument
s
 FINANCIAL MARKETS

Financial markets facilitate buying and selling of

financial instruments or services.

It is a market for the creation and exchange of

financial assets such as shares, debentures, bonds
and Government securities.
 CONCEPT OF FINANCIAL MARKETS

 A business is part of an economic system

 An economic system consists of two sectors,

viz, households and business firms
 Households saves funds and business firms invest
the funds
 Financial market act as an intermediary which makes
possible the transfer of funds from the savers to the
investors
 HOW ALLOCATION OF FUNDS WORKS?

House holds Banks Business firms

Savers Financial Markets Investors

 HOW ALLOCATION OF FUNDS

WORKS
There are ?
two alternatives through which allocation of
funds can be done - Banks and financial markets
Households can deposit their surplus funds with banks.
Banks lend these funds to business firms.
Households can also buy shares and debentures offered
by business through the financial markets.
The process of allocation of funds is known as financial
intermediation.
 FUNCTIONS OF FINANCIAL MARKET

Mobilises savings

Facilitating price discovery

Providing liquidity to financial assets

Reducing cost of transactions

 Mobilise
A savings
financial market facilitates transfer of
savings from people to investors. It offers
the savers different investment avenues
and helps to channelise surplus funds into
productive use.
 Facilitating price discovery

Price of any product or service in a market is

determined by the forces of demand and
supply. Households are suppliers of funds and
business firms are the sources of demand
 Providing liquidity to financial
assets
Financial markets provide liquidity to financial
assets. This is possible because of the ease in
the purchase and sale of financial assets.
Reducing the cost of transactions

Financial markets provide up-to-date and

valuable information about securities traded
in the market. So it saves time , effort and
money required to be spent by both buyers
and sellers to find out each other.
 Money Market

I. is the leader

• Money market is a market for short term funds,

which deals in monetary assets with period of
maturity up to 1 year
• Commercial banks & development Financial
Institutions are major players
 Fatures of Money Market
• Participants- RBI , Commercial Banks , NBFCs,
Mutual Funds and State governments
• Instruments – short term debt instruments
• Investment outlay –transactions entail huge
sum of money
• Duration - tenure of maximum one one
year; can be a single day
• Liquidity - Enjoy a high degree of liquidity
 Fatures of Money Market
• Safety – Short term duration of transactions
ensures greater safety
• Location – No physical location
• Returns – expected returns are less compared
to other markets
• Security- Instruments traded are unsecured
 SUB MARKETS OF INDIAN MONEY
MARKET
Call money market

Commercial bill market

Treasury bill market

Commercial paper

Certificate of deposit
 Call Money Market(CMM)
• Day-to-day surplus funds of banks and financial
institutions are dealt with
• Helps to maintain statutory reserve fixed by RBI

• Duration 1 day – 14 days

• Located in cities like Mumbai, Kolkata,

Ahmedabad, Chennai
• CMM functions from Monday to
 Commercial bill market
• Market for bill of exchange

• Discounted bills are rediscounted in the

commercial bill market
• Provides short term liquidity to banks

• RBI,LIC,UTI,GIC,ECGC offer re-discount

facilities
 Treasury bill market
• Short-term borrowings made by
government
• Issued at a discount on face value &
repayable at par
• RBI issues T bills
• Issued on ‘On tap’ & ‘On auction”
basis
• Duration 14 -364 days
 Commercial Paper(CP)

• Commercial Paper is a short term unsecured

promissory note, with a maturity period
ranging from 15 days to 270 days.
• CP is sold at a discount and redeemed at
par.
• CP serve as an important source of working
capital
 Certificate of deposit(CD)

• A document of title issued by

commercial banks on deposits
• Traded in money market

• Introduced in 1989

• Minimum amount is Rs.1,00,000

 Features of CD’s
• Negotiable instruments
• Issued at a discount on the face value
• Period 3 months – 1 year
• Marketable after 45 days of issue
• Issuing banks are not allowed to buy back CD’s
before maturity