DEFINATION OF FINANCIAL MARKETS

 Financial Market is a mechanism that allows people to easily buy

and sell financial securities(such as stocks and bonds),
commodities (such as precious metals or agricultural goods), and
other fungible items of value at low transaction cost and at prices
that reflect efficient markets.

 Financial markets include the stock market, bond market,

commodities market, and foreign exchange market.

 Financial markets can be domestic or they can be international.

 Financial markets could mean :-
1. Organisations that facilitate the trade in
financial products. i.e. Stock exchanges
facilitate the trade in stocks, bonds and
warrants.
2. The coming together of buyers and sellers to
trade financial products. i.e. stocks and shares
are traded between buyers and sellers in a
number of ways including: the use of stock
exchanges; directly between buyers and sellers
etc.
 Types of Financial Markets :-
The financial markets can be divided into different subtypes:

 Capital markets which consist of:

 Stock market, which provide financing through the issuance of shares or
common stock, and enable the subsequent trading thereof.
 Bond market, which provide financing through the issuance of Bonds , and
enable the subsequent trading thereof.

 Commodity markets, which facilitate the trading of commodities.

 Money markets, which provide short term debt financing and investment.

 Derivatives markets, which provide instruments for the management of financial

risk.
 Futures markets, which provide standardised forward contracts for trading
products at some future date;

 Insurance markets, which facilitate the redistribution of various risks.

 Foreign exchange markets, which facilitate the trading of foreign exchange

 “Purposes” of Financial Markets
 Without financial markets, borrowers would have
difficulty finding lenders themselves.Banks popularly
lend money in the form of loans and mortgages.
 More complex transactions than a simple bank
deposit , require markets where lenders can meet
borrowers , and where existing borrowing or lending
commitments can be sold on to other parties.
 A good example of a financial market is a stock exchange. A
company can raise money by selling shares to investors and
its existing shares can be bought or sold.
 Functions of Financial Market
 Financial market facilitates price discovery :-the continuous
interaction among numerous buyers and sellers who throng
financial market helps in establishing the prices of financial assets.
 Financial market provide liquidity:- investors can readily sell
their financial assets through the mechanism of financial market.
 To reduce transaction costs:-The two major cost associated with
transacting are
 Search cost:- comprises explicit cost (such as the expenses
incurred on advertising when one want to sell/buy an asset) and
implicit cost (such as the effort and time)
 Information cost:- incurred in evaluating the investment merit of
financial assets.
The following table illustrates where financial
markets fit in the relationship between lenders
and borrowers :-

Relationship between lenders and borrowers

Lenders Financial Financial Borrowers

Intermediaries Markets

Individuals Banks Inter Bank Individuals

Companies Insurance Stock Exchange Companies
Companies Money Market Central Government
Pension Funds Bond Market Municipalities
Mutual Funds Foreign Exchange Public Corporations
TYPES OF FINANCIAL MARKETS

FINANCIAL MARKETS

MONEY MARKET CAPITAL MARKET

 MONEY MARKET
 . The money market is a term used to described the market for short term debt
transaction .

 Informal Money Market--- informal procedure , high rate of interest ,flexible term ,
not governed by any authorities.
 Formal Money Market--- regulated by R.B.I.

 CHARACTERISTICS
 It involves in the arrangement of the short term firms .
 It deals with the high liquid instruments.
 It is the tool for the preparation of the monetary policy and fiscal management.
 It is subjected to the R.B.I. regulations.
 It tells about the trends in the liquidity and interest rates.
 Common Money Market Instruments

 Bankers' acceptance - A draft or bill of exchange accepted by a bank to

guarantee payment of the bill.
 Certificate of deposit - A time deposit with a specific maturity date shown
on a certificate; large-denomination certificates of deposits can be sold
before maturity.
 Commercial paper - An unsecured promissory note with a fixed maturity
of one to 270 days; usually it is sold at a discount from face value.
 Repurchase agreements - Short-term loans—normally for less than two
weeks and frequently for one day—arranged by selling securities to an
investor with an agreement to repurchase them at a fixed price on a fixed
date.
 Treasury bills - Short-term debt obligations of a national government that
are issued to mature in 3 to 12 months
 Capital Market
 The market for relatively long term financial
instruments such as shares , bonds , debentures ,
mutual funds and etc.
 The capital market is the market which enables the
savings of households to be available for the long
term financing of the investment and consumer goods
expenditure.
 There are two components of capital market-
 Primary market
 Secondary market
 Primary Market
 The primary market is complex of institutions
through which funds can be obtained directly
or indirectly by those who require them, from
investors who have savings .
 It includes new issue shares to the public.
 Bonus/capitalisation issues and exchange
issues by which shares in one company are
exchanged for securities of another are not
included in new issues.
 FUNCTIONS OF PRIMARY MARKET

 Facilitates the transfer of resources from

savers to enterpreneurs.
 Channeling of investible funds into industrial
enterprises
 SECONDARY MARKET
 The secondary market is the financial market for trading of
securities that have already been issued in an initial private or
public offering.

 Alternatively, secondary market can refer to the market for

any kind of used goods.

 The market that exists in a new security just after the new
issue, is often referred to as the Aftermarket. Once a newly
issued stock is listed on a stock exchange, investors and
speculators can easily trade on the exchange, as market makers
provide bids and offers in the new stock .
SECONDARY MARKET
CONTD…
 Secondary Market :- A market on which
an investor purchases an asset from another
investor rather than an issuing corporation.

 Secondary Market :- The market where

existing loans, marketable securities, stocks,
bonds, and other assets are sold to investors, either
directly or through an intermediary.
 Functions of Secondary Market

 Nexus between savings and investments.

 Provide market place
 Continuous price formation.
 Differences and Similarities
 Differences
 New v/s old securities
 Nature of financing
 Organizational differences.

 Similarities
 Stock exchange listing
 Control
 Economic interdependence