FINANCIAL SYSTEM
FM III
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Financial Markets &
Structure and Regulatory bodies
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Financial markets are a mechanism enabling
participants to deal in financial claims.
It also provide a facility in which their demands &
requirements interact to set a price for such
claims.
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To aid economic growth & development
To raise adequate resources
To intermediate resources from savers to investors
To allocate funds in an efficient manner among
competing users
To increase investment
Financial
Market
Capital
Market
Money
Market
Introduction
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The capital market is a market for financial assets which
have a long or indefinite maturity.
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It deals with long term securities which have a maturity
period of above one year.
Capital
Market
Equity
Market
Debt
Market
Introduction
i.
The market in which shares are issued and traded,
either through exchanges or over-the-counter markets.
ii. Also known as the stock market, it is one of the most
vital areas of a market economy because it gives
companies access to capital and investors a slice of
ownership in a company with the potential to realize
gains based on its future performance.
Classification
a) Primary Market
i.
ii.
iii.
Public Issues: - sale of securities to the public
Rights Issue: - offered to existing shareholders
Private Placement: - selling securities privately to a small
group of investors
b) Secondary Market
i.
ii.
iii.
iv.
NSE
BSE
Regional Stock Exchange
OTCEI
Introduction
i.
The debt market is any market situation where
trading debt instrument take place.
ii. Examples of debt instruments include mortgages,
promissory note, bonds, and Certificates of Deposit.
A debt market establishes a structured environment
where these types of debt can be traded with ease
between interested parties.
iii. The debt market often goes by other names, based
on the types of debt instruments that are traded.
iv.
In the event that the market deals mainly with
the trading of municipal and corporate bond
issues, the debt market may be known as a
bond market.
v.
If mortgages and notes are the main focus of
the trading, the debt market may be known as
a credit market.
vi.
When fixed rates are connected with the debt
instruments, the market may be known as a
fixed income market.
a) Primary Market
i.
ii.
iii.
Public Issues: - sale of securities to the public
Rights Issue: - offered to existing shareholders
Private Placement: - selling securities privately to a small
group of investors
b) Secondary Market
i.
ii.
iii.
iv.
NSE
BSE
Regional Stock Exchange
OTCEI
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Introduction
1. It is a market for financial instruments that are close
substitutes for money.
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Close substitute means can be converted into money with minimum
transaction cost.
2. Financial instruments are of short-term nature (within
1 year.
3. Money market instruments have the characteristics
of liquidity & minimum transaction cost.
4. It is a mechanism through which RBI influences
liquidity & the general level of interest rate.
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Features
1. It is a wholesale market.
2. Transaction are in volumes.
3. G enerally transaction are settled on daily basis.
4. Large no. of participants (commercial banks, mutual
funds, investment institutions, RBI).
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Instruments
1. Treasury Bills
2. Certificates of Deposits
3. Commercial Paper
4. Term Money Market
5. Call Money Market
6. Money Market Mutual Funds (MMMF)
Treasury Bill
1.
a)
TB of the Central government have been issued since the
inception of the bank.
b)
They offer short-term investment opportunity for financial
institutions, banks under the normal borrowing program of the
Central government & Market Stabilization Scheme (MSS).
c)
TB are claims against the government.
d)
TB are negotiable.
e)
TB can be rediscounted with the bank & are highly liquid.
f)
Absence of default risk & easy availability.
g)
Types of TB: 14 days, 91 days, 18 2 days & 3 6 4 days TB
Certificate of Deposits
2.
a)
It is issued by banks either directly to the investors or through
the dealers.
b)
It is document of title to time deposits with banks.
c)
They are interest bearing, maturity dated obligations of banks.
d)
They are marketable, negotiable short-term instruments in
bearer form.
e)
It is issued only when deposit growth is sluggish but credit
demand is high.
f)
It is commonly issued for 90 days.
Time Deposit v/s Certificate of Deposits
Time Deposit
Certificate of Deposit
Not freely negotiable
Freely negotiable
Not subject to stamp duty
Requires stamp duty
Can be of any period
3 -12 months, issued by banks
1- 3 years, issued by All-India
financial institutions
Cannot be issued at discount
Can be issued at discount
Commercial Paper
3.
a)
It enables highly-rated corporate borrowers to diversify their
sources of short-term borrowings.
b)
It is issued for a minimum period of 7 days and maximum of
one year.
c)
Every issue is treated as a fresh issue.
d)
It can be issued at discount to face value as decided by the
issuing company.
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Primary Market
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Secondary Market