FINANCIAL MARKET

• Financial markets are a mechanism enabling participants to deal in

financial claims.
• The markets also provide a facility in which their demands &
requirements interact to set a price for such claims. The main
organized financial markets in India are the money market & capital
market.
• Classification of financial market
• A) Money Market
• B) Capital Market
MONEY
MARKET
 MONEY MARKET
• Funds are raised for short term i.e. for one day to one year.
• The main objective of raising funds from money market is to
finance working capital.
• It is a market where low risk, unsecured and short term debt
instruments that are highly liquid are issued and actively traded
every day. It has no physical location, but is an activity conducted
over the telephone and through the internet.
• Participants are RBI, commercial banks, NBFC, mutual funds etc.
Structure of Money market in India
Unorgani Sub
Organized zed Market
• RBI • Indigenous bankers • Call money market
• Scheduled commercial banks
• Domestic money • Treasury bills
• Lenders
• Nidhi and chit funds • Commercial bills
• Development banks
• Investment institutions
• Traders and friends • Commercial papers
• Regional rural banks • Brokers and dealers • Certificate of
• Foreign banks • Zamidars etc. deposits
• State financial corporations etc
 TREASURY BILLS
• It is an instrument of short borrowing raised by the Government. It is issued by RBI on
behalf of Government.
• Unsecured instrument (It is promised by the govt. therefore, risk of default is
negligible).
• No interest is provided. It is issued at discount and redeem at par. It is also known as
zero coupon bonds.
• It is issued in multiples of Rs. 25000, Min limit is Rs. 25000, max. no limit.
• TB are promissory notes and bearer instrument(like currency notes).
• TB auctions done by RBI on Wednesday.
• First TB issued in 1917.
• Types of TB, 91days, 182days, 364 days.
 COMMERCIAL PAPERS
• It is unsecured money market instrument issued in the form of a promissory note.
• It mainly aims at enabling high rated corporate borrowers to diversify their sources of short
term borrowings. First time it was introduced in 1990.
• The companies satisfying the following conditions are eligible to issue commercial papers are
• a) Tangible Net worth is not less than 4 Crores.
• b) company is required to obtain necessary credit rating from credit rating agencies.
• c) Minimum current ratio should be 1.33:1.
• CP are issued by Corporates, Primary dealers and financial institutions. CP are also called
bridge financing.
• Time period: Min. 7 days, Max. 1 year.
• It is issued in the multiples of Rs. 5 Lakh or multiple thereof.
• It is issued on discount and redeem at par.
CERTIFICATES OF DEPOSITS
• CDs are generally issued by Commercial banks to individuals, corporations,
and companies during periods of tight liquidity when the deposit growth of
banks is slow but the demand for credit is high.
• A certificate of deposits is a savings certificate with a fixed maturity date,
Specified fixed interest rate and can be issued in any denomination. A CD
restricts withdrawal of funds until the maturity date of the investment.
• It is also known as time deposits or fixed deposits. It is issued only by the
banks against deposits kept by the companies and institutions.
• Its period is 7 days to one year. Minimum investment is Rs. 1 Lakh and in
multiple thereof.
• Investors are Ordinary individuals, Corporations, Banks, Financial institutions,
Mutual fund associations, NRIs (they are not allowed to repatriate on maturity)
• Certificate of deposit is issued at a discounted rate on the face value.
Moreover, banks and financial institutions can also issue CDs on a floating rate
 COMMERCIAL BILLS
• A bill of exchange issued by a commercial organization to raise money
for short term needs is known as commercial bill.
• When goods are sold on credit, the buyer becomes liable to make
payment on a specific date in future. For this seller(drawer) draws the
bill and the buyer(drawee) accepts it. On being accepted, the bill
becomes a marketable instrument and is called a trade bill or bill of
exchange.
• IF the seller needs funds, these bills can be discounted with a bank.
When a trade bill is discounted by a commercial bank it is known as
commercial bill.
 CALL MONEY
• It is used for inter-bank transactions. The lenders and borrowers
both are banks. The main function of this type of market is to
redistribute the surplus funds of banks among other banks that
have temporary deficit of cash.
• It deals in 1 to 15 days loans.
• The interest rate paid on call money loans is known as the call
rate. Such rates varies on day to day even on hour basis.
• Call money period is 1day, notice money period is 2 to 14 days,
and term money period is more than 14 days.
 Significance of Indian money
market
• The Indian money market plays a crucial role in the financial system by facilitating the allocation of funds between surplus and
deficit units. It serves as a platform for short-term borrowing and lending of funds, thereby contributing to liquidity
management, price discovery, and efficient capital allocation. Here are some key significances of the Indian money market:
• Liquidity Management: The money market provides liquidity to financial institutions, corporations, and the government
through instruments like treasury bills, commercial paper, and certificates of deposit. It enables entities to meet their short-term
funding requirements efficiently.
• Monetary Policy Transmission: The money market serves as a channel for the transmission of monetary policy actions by the
Reserve Bank of India (RBI). Changes in policy rates, such as the repo rate and reverse repo rate, influence short-term interest
rates in the money market, impacting borrowing and lending behavior and overall economic activity.
• Financing Short-term Needs: Businesses and financial institutions rely on the money market to finance their short-term
working capital needs. Instruments like commercial paper and commercial bills provide convenient and flexible funding options
for entities with temporary cash flow mismatches.
• Price Discovery: The money market facilitates price discovery for short-term financial instruments. Interest rates in the money
market reflect the prevailing demand and supply dynamics of funds, providing valuable information about the cost of short-term
borrowing and lending.
• Diversification of Investments: Investors use money market instruments as low-risk investment options to diversify their
portfolios. Instruments like treasury bills and money market mutual funds offer safety, liquidity, and relatively stable returns
compared to other asset classes.
 Defects of Indian money market
• Despite its significance, the Indian money market also has several defects and challenges that need to be addressed:
• Lack of Depth and Efficiency: The Indian money market lacks depth and efficiency compared to developed
economies. Limited participation, narrow product range, and regulatory restrictions impede the development of a
robust and vibrant money market.
• Highly Fragmented: The Indian money market is highly fragmented, with different segments operating under
separate regulations and oversight. This fragmentation hampers liquidity and price discovery and makes it challenging
for market participants to access funding efficiently.
• Limited Market Instruments: The range of money market instruments available in India is limited, with a
predominant focus on government securities and a few corporate instruments. The lack of diversified and innovative
instruments constrains the ability of market participants to manage risk effectively and optimize returns.
• Regulatory Constraints: Regulatory constraints and intervention, particularly in the form of statutory liquidity ratio
(SLR) and cash reserve ratio (CRR) requirements, distort the functioning of the money market and limit its
effectiveness as a transmission channel for monetary policy.
• Counterparty Risk: The prevalence of counterparty risk, especially in unsecured money market transactions, poses a
challenge to market participants. The failure of a major participant could disrupt the functioning of the money market
and undermine financial stability.
• Addressing these defects requires concerted efforts from policymakers, regulators, and market participants to
enhance market infrastructure, broaden product offerings, streamline regulations, and improve risk management
practices. A well-developed and efficient money market is essential for supporting economic growth, financial stability,
 Defects of New issue market
• The new issue market, also known as the primary market or IPO (Initial Public Offering) market, plays a critical role in
channeling funds from investors to companies seeking capital for expansion, investment, or other purposes. However, like
any market, it has its shortcomings. Here are some defects of the new issue market along with potential remedies:
• Defects:
• Information Asymmetry: Investors often face challenges in obtaining accurate and reliable information about the
companies issuing securities in the primary market. This information asymmetry can lead to mispricing of securities and
expose investors to undue risks.
• Lack of Retail Participation: The primary market tends to be dominated by institutional investors, with limited retail
investor participation. This can result in a less diverse investor base and may lead to pricing inefficiencies.
• Underpricing of IPOs: IPOs are frequently underpriced, causing companies to leave money on the table and resulting in
wealth transfer from issuing companies to investors. This underpricing can discourage companies from accessing the
primary market for fundraising.
• Long Approval Process: The regulatory approval process for IPOs can be lengthy and bureaucratic, leading to delays in
bringing new issues to the market. This may deter companies from accessing the primary market or cause them to seek
alternative financing sources.
• Market Manipulation: There have been instances of market manipulation and insider trading in the primary market,
eroding investor confidence and undermining the integrity of the market.
 Remedies of New issue market
• Enhanced Disclosure Requirements: Regulators can impose stricter disclosure requirements on companies
issuing securities in the primary market to ensure that investors have access to comprehensive and transparent
information. This can help mitigate information asymmetry and improve investor confidence.
• Promotion of Investor Education: Efforts should be made to promote investor education and awareness,
particularly among retail investors, to help them make informed investment decisions in the primary market.
• Fair Pricing Mechanisms: Regulators can encourage the adoption of fair pricing mechanisms, such as book-
building processes, to ensure that IPOs are priced more accurately and fairly reflect the underlying value of the
issuing company.
• Streamlined Regulatory Approval Process: Regulators can streamline the regulatory approval process for IPOs
to reduce delays and bureaucratic hurdles. This can encourage more companies to access the primary market for
fundraising and expedite the capital-raising process.
• Enhanced Market Surveillance and Enforcement: Regulators should strengthen market surveillance and
enforcement mechanisms to detect and deter market manipulation and insider trading in the primary market. This
can help maintain market integrity and protect investor interests.
• By addressing these defects and implementing appropriate remedies, authorities can enhance the efficiency,
integrity, and attractiveness of the new issue market, ultimately benefiting both issuers and investors.
CAPITAL
MARKET
 What is capital market?
* Capital market is the segment of financial market that dealing with
effective channeling of medium to long term funds from surplus to deficit
units.
* Normally the process of transfer this channeling is through documents or
certificates; thus is showing evidence of investments.
 TYPES OF CAPITAL MARKET
• There are two types of capital market.
• Primary market
• Secondary market
 PRIMARY MARKET
• Primary market: The primary market deals with the trading of newly
issued securities.
The roles of primary market are as follow:
Through
Origination Prospectus

Underwriting IPO Offer for Sale

Primary
Market
Private
Distribution Rights Issue
Placement

• It has no particular place. e-IPOs

 SECONDARY MARKET
• It is the place where previously issued financial instruments such as stock,
bonds, option and future are bought and sold.
• The main function is to sold the securities and transferred from one
investor or speculator to another.
• It is therefore important that the secondary market be highly liquid
(originally, the only way to create this liquidity was for investors and
speculators to meet at a fixed place).
 TYPES OF SECONDARY MARKET
1. Stock exchanges are centralized 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.
2. Over-the-counter markets
are decentralized, 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. Auction market is essentially a platform for buyers and
sellers to arrive at an understanding of the rate at which the
securities are to be traded. The information related to pricing
is put out in the public domain, including the bidding price of
the offer.
4. Dealer market is another type of secondary market in
which various dealers indicate prices of specific securities for
a transaction. Foreign exchange trade and bonds are traded
primarily in a dealer market.
Primary Market Secondary Market
Securities are initially issued in a
primary market. After issuance, such Trading of already issued securities
securities are listed in stock exchanges takes place in a secondary market.
for subsequent trading.
Investors enter into transactions among
Investors purchase shares directly from themselves to purchase or sell
the issuer in the primary market. securities. Issuers are thus not involved
in such trading.
Prices of the traded securities in a
The stock issue price in a primary
secondary market vary according to the
market remains fixed.
demand and supply of the same.
Sale of securities in a primary market Transactions made in this market
generates fund for the issuer. generate income for the investors.
Issue of security occurs only once and Here, securities are traded multiple
for the first time only. times.
Primary markets lack geographical A secondary market, on the contrary,
presence; it cannot be attributed to any has an organizational presence in the
organisational set-up as such. form of stock exchanges.
CAPITAL MARKET INSTRUMENTS
• Equity instruments ( common stocks)
• Debt instruments
• Insurance instruments.
• Hybrid instruments
• Derivatives
 EQUITY INSTRUMENTS
• Equity is used when referring to an ownership interest in a business.
Examples include stockholders' equity or owner's equity
• In the capital market equity is used as a source of finance(capital)
• When the company wants to raise funds it can issue common stock or
preference shares.
 EQUITY INSTRUMENTS
Common stock:
• A security that represents ownership in a corporation and gives no fixed rate of dividend.
• When the company issue common stock they gives shareholder to own some part of
company ownership.
• Holders of common stock exercise control by electing a board of director and voting on
corporate policy.
• In the event of liquidation, common stockholder have rights to a company's assets only
after bondholder, preferred shareholders and other debtholders have been paid in full.
 COMMON STOCKS
• If the company goes bankrupt, the common stockholders will not receive
their money until the creditors and preferred shareholders have received
their respective share of the leftover assets.
• This makes common stock riskier than debt or preferred shares. The
upside to common shares is that they usually outperform bonds and
preferred shares in the long run.
 PREFERENCE SHARES
• The holder of preference share also own some percentage of the company
but cannot participate in anything to the company.
• Rate of dividend on PS is fixed.
• Normally has the first priority if there is any dividend payment than
common stock holder.
• The main benefits to owning preference shares are that the investor has a
greater claim on the company’s asset than common stockholders.
 PREFERENCE SHARE
• Preferred shareholders always receive their dividends first and, in the event the
company goes bankrupt, preferred shareholders are paid off before common
stockholders.
• In general, there are four different types of preferred stock.
• Cumulative preferred stock
• Non cumulative preferred stock
• Participating preferred stock
• Convertible preferred stock
CUMULATIVE PREFERRED STOCKS
• A preferred stock will typically have a fixed dividend yield based on the
per value of the stock. The dividend usually is paid out at set of interval,
usually quarterly to preferred stock.
• If a company runs into some financial problems and is unable to meet all
of its obligations, it will likely suspend its dividend payments and focus
on paying the business-specific expenses. If the company gets through the
trouble and starts paying out dividends again, it will first have to pay back
all of the dividends that are owed to preferred shareholders.
 NON-CUMULATIVE PREFERRED STOCKS

• A type of preferred stock that does not pay the holder any unpaid or omitted
dividends.
• If the corporation chooses to not pay dividends in a given year, the investors does
not have the right to claim any of those forgone dividends in the future.
Example XYZ Company chooses not to pay its Rs. 5 per share annual dividend to its cumulative preferred stockholders. In
this case, these shareholders do not receive the dividend this year, but they are entitled to collect this dividend at some
point in the future. If the preferred shares mentioned above were noncumulative, the shareholders would never receive the
missed dividend of Rs. 5.
 PARTICIPATING PREFERRED
STOCKS
• A type of preferred stock that gives the holder the right to receive dividends equal
to the normally specified rate that preferred dividend receive as well as an
additional dividend based on some predetermined condition.
• The additional dividend paid to preferred shareholders is commonly structured to
be paid only if the amount of dividends that common shareholders receive exceeds
a specified per-share amount.
• Furthermore, in the event of liquidation , participating preferred shareholders can
also have the right to receive the stock's purchasing price back as well as a pro rata
share of any remaining proceeds that the common shareholders receive.
 PARTICIPATING PREFERRED
STOCKS
• For example, suppose Company Z issues participating preferred shares with a dividend
rate of Rs.10 per share. The preferred shares also carry a clause on extra dividend for
participating preferred stock, which is caused whenever the dividend for common shares
exceeds that of the preferred shares.
• If, during its current quarter, Company Z announces that it will release a
dividend of Rs.12 per share for its common shares, the participating
preferred shareholders will receive a total dividend of Rs.12 per share
(10+2)
CONVERTIBLE PREFERRED STOCKS

• Preferred stock that includes an option for the holder to convert the
preferred stock into a fixed number of common shares, usually any time
after a predetermined date.
• Most convertible preferred stock is exchanged at the request of the
shareholder, but sometimes there is a provision that allows the company
(or issuer) to force conversion.
• The value of convertible common stock is ultimately based on the
performance of the common stock.
 DEBT INSTRUMENTS
• A paper or electronic obligation that enables the issuing party to raise
funds by promising to repay a lender in accordance with terms of a
contract. Types of debt instruments include notes, bonds, certificates,
mortgages, leases or other agreements between a lender and a borrower.
• Debt instruments are a way for markets and participants to easily transfer
the ownership of debt obligations from one party to another
 DEBT INSTRUMENTS
• A debt instrument is used by government or other organizations to generate funds for
longer duration.
• The relation between person who invest in debt instrument is of lender and borrower .
• This gives no ownership right.
• A person receives fixed rate of interest on debt instrument.
• A debt instrument is used by either companies or governments to generate funds for
capital-intensive projects. It can obtained either through the primary or secondary
market.
 TYPES OF DEBT INSTRUMENTS
There are many kinds of debt instruments among of them are as follow.
Debenture.
Bond
 Government bond
 Corporate bond
 Convertible bond
Loan
Mortgages.
 DEBT INSTRUMENTS
• Debt instrument or debt financing allows you to pay for new buildings,
equipment and other assets used to grow your business before you earn
the necessary funds.
• This can be a great way to pursue an aggressive growth strategy,
especially if you have access to low interest rates.
• Relative to equity financing, you also benefit by not hand over any
ownership or control of the business
 DEBT INSTRUMENTS
• On the other hand of debt financing is that you have to repay the loan,
plus interest. Failure to do so exposes your property and assets to
repossession by the bank.
• Debt financing is also borrowing against future earnings. This means that
instead of using all future profits to grow the business or to pay owners,
you have to allocate a portion to debt payments. By Misappropriation of
debt can severely limit future cash flow and stifle growth.
 HYBRID INSTRUMENTS

• A single financial security which combines two or more different financial

instruments.
• The most common type of hybrid security is:
• convertible bond: which have features of an ordinary bond but is heavily
influenced by the price movements of the stock into which it is
convertible. Normally the owner of convertible bond have the right to
convert convertible bond to share (common stock) in the issuing company
or cash of equal value.
 HYBRID INSTRUMENTS
• Issuing convertible bonds is one way for a company to minimize negative
investor interpretation of its corporate actions. For example, if an already
public company chooses to issue stock, the market usually interprets this as
a sign that the company's share price is somewhat overvalued. To avoid this
negative impression, the company may choose to issue convertible bonds,
which bondholders will likely convert to equity.
• From the investor's perspective, a convertible bond has a value-added
component built into it; it is essentially a bond with a stock option hidden
inside.
 HYBRID INSTRUMENTS
• Thus, it tends to offer a lower rate of return in exchange for the value of
the option to trade the bond into stock.
• Furthermore, another popular type of hybrid security is :
• Convertible preference share : which pay dividends at a fixed or floating
rate before common stock dividends are paid and can be exchanged for
shares of the underlying company's stock.
 HYBRID INSTRUMENTS
• Each type of hybrid security has unique risk and reward characteristics.
• When we look from convertible bonds if offer greater potential for appreciation
than regular bonds, but it pay less interest than compared to other bonds,
instead of that it still face the risk that the underlying company could perform
poorly and fail to make coupon payments or not be able to repay the bond's face
value at maturity.
• On other side convertible preference share offer greater income potential than
regular securities, but can still lose value if the underlying company
underperforms.
 INSURANCE INSTRUMENTS
• Is a financial instruments whose values are driven by insurance loss
events. Those such instruments that are linked to property losses due to
natural catastrophes represent a unique asset class, the return from which
is uncorrelated with that of the general financial market.
• Insurance companies are in the business of assuming risk for individuals
and institutions.
• They manage those risks by diversifying over a large number of policies,
perils and geographic regions.
 INSURANCE INSTRUMENTS
• There are two important ways insurers profit in this business.
One is by selling portfolios of insurance policies grouped into packages,
to interested investors. The risk from low severity, high probability events
can be diversified by writing a large number of similar policies. This
reduces an insurer’s risk because should a policy default, then the loss is
shared between a large numbers of investors.
 INSURANCE INSTRUMENTS
• The second way insurers profit on policies is by re-insuring them through
other insurers. A reinsurance policy would allow a second insurer to share
in the gain and potential loss of the policy, much like an investor. The
secondary insurer would share invested interest and risk. The reinsurance
of policies offers additional risk capital and high returns for the policy
originator, and minimizes their liability, while also providing high returns
for any secondary insurer.
 DERIVATIVES
• In the OTC interest rate derivatives (IRD) segment,
interest rate swaps (IRS) and forward rate agreements
(FRA) are permitted on various benchmarks where banks
and primary dealers (PD) take hedging and trading
positions. Other regulated entities like insurance
companies, mutual funds, Non-Banking Finance
Companies can participate in IRD for the purpose of
hedging.